Stop Prices: Are They For You?

A Stop Price is like a pane of glass. Once it gets hit, it's broken. The use of Stop-Prices is one of the most controversial and misunderstood methods of selling stocks. Stop-Prices are two-edged swords. They can cut losses and protect profits, or result in high turnover and lost opportunities. Are they for you?

Selling is a crucial part of successful investing. Yet, it is avoided like the plague. The reasons are clear. Buying a stock is fun, a positive event. It's the beginning of a hopeful relationship.

Selling is a negative experience, the end of the relationship. Hope of future profits is gone and losses become reality. Tax consequences must be addressed and the proceeds need to be re-deployed. Selling is not fun, but it must be done.

While there are no hard and fast rules for selling stocks, each investor eventually makes decisions to sell. The need for funds, tax considerations and a myriad of other factors enter into these decisions. Whatever the reasons, the primary purposes of selling are:

1. To control losses, and

2. To protect profits.
Stop Prices are ideally suited to do both.

STOP-PRICES. The term “Stop-Price” comes from the practice of selling stocks falling to specified prices. For example, if one of your stocks were at $27 a share and you were concerned that it was going down in price you could place a “stop-loss” order to sell the stock at a specified price, say $25. In this case the Stop-Price is $25. Your broker would enter a “stop-loss” order to sell the stock if it fell to $25.

A “stop-loss” order does not guarantee that your order will be executed at the Stop-Price. The price at which your stock is sold depends upon market conditions. In severe downturns, stocks may be sold well below Stop-Price. It is also important to know that “stop-loss” orders can be executed on exchange-traded stocks, e.g., New York and America stock exchange, but not on over-the-counter (OTC) stocks. Read more