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Monday, Dec 4, 2023

Stop Loss Orders Not Practical in Today’s Market

Chamberlin On Money: George Chamberlin

Dear George: With stock prices moving so high, isn’t it a good idea to use stop-loss orders to protect your profits?

, Eric, Del Mar

Dear Eric: There aren’t many feelings worse than watching paper profits disappear when a stock declines in price. Of course, seasoned investors know that stock prices go up and down. Volatility is part of the investing game.

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One tool used by investors to protect profits without reducing the possibility of further gains is something called a “stop-loss” order.

It works quite simply. Let’s assume you have doubled the value of a stock that has risen in price to $50 a share. You think there is still room for the price to go even higher but you also worry that a sharp decline in the overall market could wipe out your gains.

So, you instruct your broker to enter a stop-loss order at $45. What this means is that if the stock pulls back to that price your order will be executed. You’ve left the door wide open for more gains but have reduced your downside risk.

On the surface this seems like a good strategy. However, in practice I have found it to be less than perfect. For one thing, when the stock drops to your stop price it becomes a market order. That means it will sell at the price of the next trade. Let’s again assume the stock closes one day at $48. Overnight the company issues an earnings warning and the stock opens the next day at $35. You will be lucky to get that price and not one even lower.

Another danger relates to the increased volatility of today’s markets. A stop-loss order 10 years ago was a practical caution. Prices moved much slower and it was easier to enter these types of trades.

Today, a stock can open at $45, drop to $35, and bounce back to $50 within one hour of trading. Stop-loss orders can often result in the selling of a stock that you would much rather hold onto for a long period of time.

Stop-loss orders can be a helpful tool for stock traders but a dangerous trap for long-term investors. Be sure to go over this strategy with your financial adviser before making any decisions.

Dear George: I really want to get serious in 2000 about cleaning up my credit and doing a better job with my finances. Any suggestions on where I can get some good advice?

, Andy, San Diego

Dear Andy: Good for you. Living below your means is probably the smartest thing you can do to wipe out those high-interest credit card accounts and learning how to live on a budget. However, it’s always a good idea to use some resources that have worked for others in the past.

The local offices of Consumer Credit Counseling Services will be holding workshops in January to deal with statement shock when the holiday bills start to come rolling in. This nonprofit organization provides free counseling and , if necessary , can help you set up a payment plan with your creditors. This group is affiliated with the National Foundation for Consumer Credit, and educational information is available on the Internet at (www.nfcc.org).

Another online resource worth checking out is available through the Federal Trade Commission (www.ftc.gov). It’s always nice to see your tax dollars being put to good use, and this Web site is a gold mine of information on a number of dollars and cents issues.

Finally, believe it or not, the credit card companies themselves actually offer some great budgeting and educational information. Again, the Internet is the place to find lots of useful material. Both Visa (www.visa.com) and Mastercard (www.mastercard.com) will help you avoid abusing credit and deal with problems if they arise. Good luck.

Chamberlin is the host of “Money in the Morning,” heard weekdays from 9 a.m. to noon on Ksdo.com AM 1130. Send your letters to him to P.O. Box 1969, Carlsbad, CA 92018, or E-mail him at (george@moneyinthemorning.com).


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