The Value Of A Stop Loss.
by, 18th-June-2008 at 05:14 PM (1442 Views)
I always employ a stop loss whenever I buy a stock. I see it is a form of insurance.
But it has a twofold purpose as it stops you having a too great a loss and you can use it to lock in those profits by using a trailing stop loss as the share price rises.
The beauty of a stop loss is it gives you peace of mind and stops you worrying about what the stock is doing. Particularly if you can’t follow the share price action because you have to be somewhere else and not sitting at the computer.
My advice to everyone is “Never leave home without one!” It is a small price to pay and they are worth their weight in gold literally.
Other things to consider when buying a stock are :-
1. There is No guarantee that you will get the stock at the price you want to pay for it
2. If you have an ” at market” order you could end up paying more than you wanted to as the stock opened up higher than the last price you saw on the Friday before.
3.Worse case scenario is you bought at the highest price and by the time you get to look at the share price it has come off the boil, profit takers have been busy , the price went backwards leaving you high and dry and immediately out of pocket.
So you now have two options available to you, turn that “paper loss” into a real one OR wait till the share price regains its former high price.
Before I used a “stop loss” I held on to two stocks which had been high and went backwards. I held onto these stocks hoping they would rise back up again in the next day or so.
They both continued downwards till my “paper loss” was nearly 50%, I kept telling myself they will go back up again. They did but around 6 months later and then I got out at a small loss on one and a larger loss on the other.
Looking back in hindsight, I should have taken those small losses immediately for I had around $1,000 tied up, which could have been making me a profit elsewhere.
Or of course had stop losses in place (I had never heard of them until it was too late).
So it was one of my most costly mistakes and taught me a hard lesson which I have never forgotten.
In the share market world you are guaranteed to make mistakes in timing and buying the wrong stock .The stop loss minimizes those mistakes.