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We hope that you are beginning to see that there isn't too much to doing this, just knowing a few terms and how to use them. So far, you now know what the market is, what a stock is, a spread, a limit order, a good till cancel order, an

We hope that you are beginning to see that there isn't too much to doing this, just knowing a few terms and how to use them. So far, you now know what the market is, what a stock is, a spread, a limit order, a good till cancel order, an ask and a bid! With this alone you could start trading, but it would be wise to learn a few more things!!

What could be next, you ask? Well, along with limit orders and good till cancels, there is a very important tactic called a "stop loss order." This is where you tell the broker that you want to attach a stop loss order on your stock and it works like a guard for you when you are away from the market. No one picks winning trades every time, and you will not be the first. That means that you are going to buy a stock that not only doesn't rise for you, it sinks like a stone!! If you are watching it happen you can call your broker and tell him to SELLLLL!!!!!! But what if you are out on the lake with your kids? A stop loss will save you from a horrible shock by selling your stock for you at a pre determined loss point. Suppose you bought XYZ with the concept that it was going to fly, but one hour after you bought the stock they released news that their Asian unit just went bankrupt? The stock would fall like the proverbial rock, so to protect yourself we recommend using stop limit orders. Pick a figure that you can live with, say, two dollars per share, and attach that. Here's how (broker's comments in italicized type):

Yes Mrs. Jones?"

On that 100 shares of XYZ I own, I would like to attach a stop limit order at the price of 48.

"Okay, let me read this... you want to attach a stop loss order to your 100 shares of XYZ at the price of 48, is that correct?"

Yes it is.

"Okay Mrs. Jones, that has been sent. Anything else?"

No thank you.

That's it. Now even if you are in Europe and XYZ falls like a stone, you will be sold off at approx. 48. These are VERY IMPORTANT tools, and we personally won't make a trade without attaching a stop loss order. You shouldn't either!!!

*NOTE: One other useful tactic that we use with the stop loss order is when a stock is rising, we constantly "adjust up" our stop order. For example, let us assume you bought the XYZ Company, and it cost you 50 dollars per share. Now the next day it is up 2 and the next day it's up another dollar. Pretty soon XYZ is at 54. Well, we certainly don't want to leave our stop loss order at 48!! Why let XYZ lose all that money?? So we simply call our broker and reset our stop closer to where the price is now. In this instance, you may set it at 52. This way if it keeps rising, you simply readjust even higher, but if it reverses, you don't lose all the precious profit's you just made! Lock in those profit's!

Up Next : The GAP Opening
Return to Investing 101

 



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