How to protect your investments in markets lower
Markets are a Russian roulette in the short term. Up one day down the next day, they are impossible to predict. But there are techniques to try our savings will not suffer so much with these movements. Let’s see what they are …
A stop loss order is an order to sell a position when the price of these assets comes at the price determined by the investor. Once the price of the selected price pierces the order is executed automatically. That is, the order is entered the market. Stop loss orders help control losses.
However, stop loss orders do not guarantee that you will get the price you want. Price differences between the closing price one day and the opening price of another day may impact on stop loss orders and not allow the price is settled at the price indicated. However, stop loss orders are necessary to manage the risk of an investment portfolio. You should always use a stop loss order on their investments.
Learn to use the Stop orders
There are different types of stop:
Stop market (losses brake market): It is the best known and this order is due to its simplicity: only charge a price (the trigger), assuring the investor that if their roles operated at that level, a sell order at market price (highest bidder at that time) will be implemented immediately.
For example, if you buy a thousand shares of Microsoft (MSTF) to $ 30 each and that he is not willing to face a loss of more than $ 2,000 for this investment, market puts a stop to $ 28 (two-dollar loss multiplied by the thousand shares purchased).
If MSFT is operated action sometime in $ 28 or less will automatically be launched to market a sell order for the total position.
Nevertheless, it is necessary to consider an issue ignored by many. Since no one guarantees that the price is the same at the opening of operations in the previous close, could come to pass that MSFT close $ 28.20 a day to open the next day, for example, $ 26 ( this could happen by negative news released after the close of the market about the company).
If this occurs, the stop order sales would soar to the highest bidder at that time, say at $ 26. Thus, the loss would be 4,000, not $ 2,000 as was his intention.
The stop market ensures that we will sell your position if the action is operating below the chosen price, which does not guarantee is the price at which the sale is made.
Stop Limit (brake to limit losses): When you load this type of order, must be set two prices: the activation of the stop and limit price to sell the position.
If you follow the example used above, the maximum loss you are willing to withstand around $ 2,000. But in this case, one does not bear the risk of having to leave at any price. Therefore, placing a stop limit order specifies where to be activated if the stock trades at $ 28, but the sales price limit is $ 27.90.
With this, if it happens as in the previous case, the action start trading at $ 26 after closing at 28.20 yesterday, will automatically launch an order to sell their position of 1,000 shares of MSFT, but this time, rather than at market prices, would have a limit of 27.90. For this reason, must wait for the paper up a bit to run. The risk here is that this might not happen ever.
Thus, the stop limit price guarantees the price at which sold its position in case the action is operating below the price chosen, which is no guarantee that this sale is made.