Stop Limit Loss Sell Orders: A Simple Yet Powerful Investment Tool

During 2008, investors saw historic losses in the stock market. For those who did not sell into the storm, it may take years for your investments to regain their value. This situation could have been avoided with a simple yet powerful tool.

Stop Limit Loss Sell Order

Whenever you buy a stock and/or other security, issue a stop limit loss order with your brokerage firm. You can do this on a daily basis, or more preferably, with a "Good til canceled" order. You limit your loss before the security drops in significant value. You may select a percentage to limit your potential losses. For example, if the stock was purchased for $50 per share, and you wanted to limit your losses to 10%, you would issue a good til canceled stop limit order for $45 per share.

For securities where you can't issue such an order, monitor your investments and sell them when you reach a predetermined loss limit. Few brokers will remind you to sell a stock. It is our collective responsibility to monitor our investment portfolios to limit downside risk. Stop limit orders impose a sense of discipline, and remove the emotional component of stock investing. Instead of watching your investment decline in value, you have imposed a set strategy to limit your losses.

When to Sell

According to Investors Business Daily, "the first rule is sell any stock that falls 8% below your purchase price. Why 8%? Because research shows stocks showing all the right fundamental and technical factors in place and bought at precisely the proper buy point (which is explained fully in the "Using Stock Charts To Round Out Stock Selection" lesson of the stock buying course) rarely will retreat 8%. If they do, there's something wrong with them."

Benefits of the Stop Limit Order

According to the Securities and Exchange Commission (SEC), "The benefit of a stop-limit order is that the investor can control the price at which the trade will get executed. But, as with all limit orders, a stop-limit order may never get filled if the stock's price never reaches the specified limit price. This may happen especially in fast-moving markets where prices fluctuate wildly."

Investors Business Daily also reminds us of important factors when stocks and/or mutual funds lose value:

The bigger the fall, the harder it is to recover. Say you bought a stock at $100 a share. It falls 20%, to $80. To get back to $100, the stock has to make a 25% gain. Another example: The stock plummets 50%, to $50 a share. It would take a 100% jump to get it back to $100 — and how often do you buy a stock that doubles? And if it does, how many weeks, months or even years does it take to get there? Wouldn't you rather cut your loss early, and free up money to purchase another stock with better chances of doubling?

Invest Like Professionals

Limit your losses with the efficient and powerful stop limit loss order. Those in the business of buying and selling securities evaluate risk versus return, along with strategies to limit losses. So should the rest of us.