Stop Loss Orders: How to Buy and Sell Shares – Part III

Two weeks ago I gave you a primer on buying shares.

And last week I gave you the inside run on selling shares.

[Ed Note: You can now download the entire ‘How to Buy and Sell Shares’ six-part series for FREE. To download your copy right now go here.]

But that’s not all. Last week I also wrote this:

“I’ve received a number of related questions which I’ll cover next week in a Q&A session. So, if there’s anything you feel I haven’t covered and you have any questions, just send them to moneymorning@moneymorning.com.au and type ‘Questions about buying and selling shares’ in the subject line.”

So far I’ve collected over five pages of questions! At this rate the series could end up going longer than Neighbours!

Fortunately, some of the questions were similar. The most popular was to do with stop-loss orders. So that’s what I’ll cover this week.

But to give you a taste of the things I’ll cover over the next few weeks, here’s an edited list:

  • What are exchange traded funds (ETFs) and how can I trade them?
  • You say to buy gold and silver, but isn’t that for rich folks?
  • I’ve heard about CFDs. What are they and should I use them?
  • Do I have to tell the tax man about any profits I make from shares?
  • Should I be a trader or an investor?
  • How much do I need to get started in shares?
  • How does the stock market work?
  • Are call options and put options just for the experts or can anyone use them?
  • I’m interested in short-selling but I don’t understand it.
  • I’m having sleepless nights worrying about my shares, is that normal?

That just about covers it. Now, some of those subjects overlap. So, in coming weeks I may combine some of those questions and answers in the same topic.

But I can’t tell you in which order I’ll answer these questions, because… well, I haven’t written the answers yet. So you’ll just have to read each weekend to find out. Until then let’s take a look at this week’s topic…

Stop Loss Orders

Some of our investment advisories recommend using stop orders. The instructions for using stop orders may look like this in the investment advisories:

“Action to take: Buy XYZ Limited [ASX: XYZ], recent price 20 cents. Buy up to 25 cents and set trailing stop at 16 cents”

The part we’ll focus on this week is the last part of the instruction – “…set trailing stop at 16 cents”.

So, what is a stop-loss order? The best way to think of it is a stop loss helps stop you losing money. Or, if you’re in profit, it helps stop you giving back your profits if the share price falls.

Here’s how it works: say you get a share tip from me to buy XYZ Limited stock at 20 cents. You like my reasoning and so you buy it.

Now, here comes the stop loss part. The idea of a stop-loss order is to protect you if the share price falls. In this instance, let’s say I tell you to set your stop-loss order at 16 cents. That means you sell the shares if the share price falls to 16 cents.

This protects you, because if the stock keeps falling – to 15, 14, 12, or 9 cents – you’ll still only lose 4 cents per trade, so long as your stop loss is in place.

It’s as simple as that. As for the “trailing” part of trailing-stop orders, it simply means if the share price keeps moving up, then you should keep moving your stop order higher.

So let’s say that within a week the share price has moved from 20 cents to 30 cents. If you want to make sure you don’t give back the 10 cents of profits, you could move your stop order from 16 cents to – say – 25 cents.

This means if the share price falls, you’ll sell the shares for 25 cents, giving you a 5 cent profit. Simple isn’t it? Well, almost…

Unfortunately, some online brokers have different ways of handling trailing-stop orders. In fact, they can’t even agree on what to call them.

In some instances you’ll find them called stop orders. In others it could be conditional orders. And others may call them trigger orders.

If you’re unsure whether you’re using the correct order for your trades always give your broker a call to clarify it with them. Maybe even get them to walk you through a trade while they’re on the phone.

But, there is an alternative. Some traders and investors don’t use actual stop orders. Instead they’ll set up an alert with their broker. This means they receive an email or an SMS when a share price reaches a certain level.

So for instance, you may want to get an alert if the share price falls to 17 cents. In that case, once you’ve received the alert you can then decide whether you’re happy to hold on or whether you’d prefer to sell.

This works well for many people. And it’s certainly a good alternative if your broker doesn’t offer stop orders.

Oh, and by the way, even if they offer stop orders, some brokers will charge you just for placing the order. And when you sell the shares, they’ll charge brokerage too!

So make sure you check out all the costs with your broker.

Now, there is one final thing to point out. Setting a stop order DOES NOT guarantee that you’ll sell the shares at that price.

Which Stop Order?


There are two types of stop order, so you should ask your broker which one they offer. The first type is just a plain old stop-loss order.

If the share price falls to 16 cents it will trigger the stop-loss order and sell your shares as a market order. That means you’ll sell the shares at the highest price on the bid side of the market (refer to last week’s article).

If the highest price on the bid side is 16 cents then that’s the price you’ll get. However, in a fast moving market it’s possible that by the time your order is processed the highest price on the bid may only be 15.5 cents or 15 cents. In that case, this is the price you’d get.

That’s “gapping”. Where a price “gaps” through a price level.

The alternative is an order type called a stop-limit order. This is slightly more complicated. It works like this…

When you set your stop level, you also set a stop-limit level. It could be something like this: you set the stop level at 16 cents and the stop limit at 15 cents. So, when the share price hits 16 cents an order will go into the market to sell your shares, but at a price no worse than 15 cents.

That means you won’t sell the shares if the price “gaps” through 15 cents to 14.5 cents and then 14 cents. You would still hold them. In contrast, with a standard stop-loss order your shares would have traded at 14.5 cents and you would have sold them.

Finally, there’s always the chance that after you sell the shares, the share price could rally and move higher again. That can be frustrating. But, if that happens, my advice is to quickly lick your wounds and move on.

Because, do you know what? For every time that happens there are other occasions when the share price keeps falling and you’ll wish you’d sold.

In my view stop orders are a handy tool to help minimise your risk. Plus it helps make sure you don’t give away all your profits if the share price starts to fall.

I hope that gives you some idea about how stop orders work. Of course, because I only have limited space, there may be a few points I’ve missed. But this is a good starting point for you, and should give you the confidence to speak to your broker about how they process stop orders.

Of course, if you’re a high-risk speculator then you probably won’t want to use stop orders. If that’s the case that’s fine. They aren’t compulsory. And they aren’t for everyone

But ultimately, it’s completely up to you.

Next week I’ll cover one or more of the questions listed above.

Cheers.

Kris Sayce
For Money Morning Australia

P.S. This is just one, of a six-part series written by Money Morning Publisher Kris Sayce. For your convenience we’ve bundled the whole series into a brand new report titled ‘A Beginner’s Guide to the Stock Market: How to Buy and Sell Shares’. In it you’ll find easy–to–read and jargon free instructions on the steps you need to take to jump into the market TODAY and buy and sell your first lot of shares.

If you’ve got an interest in the share market, but completely new to the whole deal and don’t know where to start… download Kris’ new report today and he’ll show you everything you need to know to get started. Go here to download your free report today.


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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25 responses to “Stop Loss Orders: How to Buy and Sell Shares – Part III

  1. Hi Peter Fraser
    Asking lately is what going to trigger the next crash?
    House bubble in China?
    Bond market?
    My money is on the bond market it will collapse and interest rates will soar because investors (suckers) will fear default in the bond market.
    Too much debt is yet to blow up.
    Do you think the MMR crowd have work out yet I’m a real individual?
    They call me shit4brains that’s calling the kettle black and have to have a good laughed sometimes so sure about their sockpuppet delusional thinking.
    They are the True Believers ( Eric Hoffer) no doubt massive movement of sheep.
    Good traders start with the idea they don’t know and have got crappy ideas to challenge.

  2. TRB – well you commented previously about good traders assuming that they know nothing, which contrasts to comments 11 and 13 at
    http://groups.google.com/group/money-morning-refugees/browse_thread/thread/011fe7292cf6a3fb
    where they assume that they know everything, and the other 7 billion of us are stupid.

    But to answer the question – No I don’t think that they have worked out that you and many others who have made comments here are individuals, who hold contrary views to them. It is inconceivable to them that they could be wrong.

    And that is scary….

    Still many bloggers on other sites have had some real laughs reading their little rants.

    But more importantly – specifically why will the bond market implode? Was the US bond market in a bubble, and is it still?
    Will they soon have difficulty raising cash at close to ZIRP rates?

  3. Peter Fraser – One of these days you might consider getting out of the spinning business. In your twisted world, black is white, slavery is freedom, the downside is up, and people who expose your lies and spin are “scary.” What is next? Lebelling them “terrorists” ?

    Not one straight bone in your body, let alone in your ratturdbrain, is there?

  4. Well Peter Fraser you are right rest your case.
    These MMR bloggers will never believe I’m a real individaul!

  5. lol, STT. These are the monologues of schizoid, split personality. Or, more generously, the sick puppy simply likes talking to himself by other names.

  6. Yes Misinformation Police, it seems he is getting all those computers in his house mixed up in the process. So many different computers to house the sockpuppets. I miss “Janet”. Perhaps Peter Fraser ran out of lipstick.

  7. You could get Kris Sayce to resolved this and check domain names address and contact me.
    However that would spoil all the fun and I would get no more good laughs.
    life is too short to deal with delusional thinking , don’t think Kris Sayce would waste his valuable time on it.

  8. Karl – time to get a life mate.

    Clearly you are not really a policeman, and certainly you have had no training in spotting untruths, otherwise you wouldn’t have been so easily duped at the MMR site.

  9. TRB – I think the original Karl was a policeman, but now dc has just created another sockpuppet. That is his second impersonation of a policeman.

    Just disregard the posts.

  10. Hi Peter Fraser
    Original Karl wanted to protect his capital and get good financial advice, if he takes financial advice from MMR Karl will end up in the poor house.
    One poor MMR blogger lost $6200 the other MMR bloggers advice was to buy gold,oil,TV or ipod with the $6200 loss!
    Right advice was to stop trading ,stay calm and put your remaining cash in a safe bank.

  11. Excuse me Peter Fraser, it seem that the general consensus pertaining to your mischievous character is well justified.
    If you are an example of those in the financial industry then you are a disgrace to say the least. Not only do you insult those who do not share your views but intentionally mislead for, as it seems, personal gain.

    You threaten and have displayed a tendency to do so through an alias. As this site Money Morning Australia claims that all details are private and confidential, it is interesting how, you feel confident that you can gain access to those private detail. Such an action would have severe legal repercussions.

    What further disturbs me further is the fact that you constantly have claimed that you do not use aliases on this site, I have evidence to the contrary. Further it is obvious that you have knowledge of the identity of the so-called blogger “Truine Rational Brain “. I bring to your attention this the following:

    “Truine Rational Brain February 28, 2011 at 2:51 pm
    You could get Kris Sayce to resolved this and check domain names address and contact me.”
    “check domain names address and contact me.”: indicates that you know the writer and have his/her private details. Or “Truine Rational Brain “ and yourself are one of the same. Also obvious is that the writer “Truine Rational Brain “ asks you to get the information from the editor and pass on the information. Why wouldn’t ““Truine Rational Brain “.contact the editor directly but rather ask you to do it? What would “Truine Rational Brain “ then do with this information. Either way you are clearly an accomplice, if not the sole perpetrator, and the editor would have a serious case to answer.

    My interest has now elevated to a higher level.

  12. Karl – good grief – your are even worse than I thought. I was very patient and gave you the benefit of the doubt with more information than I really should, but now you pull the bullyboy tactic.

    Mate you can’t turn up at blog sites and do the policeman standover tactic.

    Sorry it just doesn’t wash, and neither should it. You don’t have juristiction here. Go write out a parking ticket.

  13. So funny Karl need to relax mate this is Australian not Libya.
    Take dog for a walk or play cricket.
    I’m a real individual and it’s a free country.

  14. Karl wanted to protect your capital mate stop trading,stay calm and put your cash in major safe bank with government gaurantee eg Westpac or Commonwealth Bank.
    Great books you can read example
    Irrational Exuberance by Robert Shiller
    Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay.
    The Crowd Study of the Popular Mind by Gustave Le Bon.
    Good luck.

  15. TRB – those are all herd books, I see where you get your irrational crowd ideas from.

    Any other suggestions other than that subject, I’m having a few days off next month and reading has become a luxury for me.

  16. Great book if you enjoy history and progress of western business over 13000 years.
    guns, germs and steel by Jared Diamond
    However I think best book you will like is The Psychology the Influence of Persuasion by Robert B. Cialdini especially the chapter on authority how we are a sucker for titles policemen is example but you did not fall for the influence con by Karl.

  17. Sorry Peter Fraser comment 22 is for you, getting tied and old time to go to bed.
    Good luck.

  18. A very good explanation of how to trade CFDs can be found athttp://www.ichi360.com/?p=2280

    This is from one of our own Aussies guy, great trader.

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