In the WSJ, Simon Constable looks at the pros and cons of stop orders.
Sometimes when you’ve made substantial gains on a stock or exchange-traded fund, you face a tough choice: Do you sell to lock in the profit? Or hold on for more gains but risk losing what’s been made?
One way to have your cake and eat it too is to use a trailing stop order: an order to sell your position if the price falls by a predetermined percentage or dollar amount. Most orders are set 20% below the current price, says Eddy Elfenbein, editor of the Crossing Wall Street newsletter. Some people also periodically cancel the orders and reset them at higher prices if there is a rally. Stop orders cost a little more than simple market orders.
Mr. Elfenbein notes that once you have a gain on paper, it’s psychologically very hard to watch it disappear. The ability to protect those gains makes the trailing stop order very appealing.
But these orders aren’t without peril. “There is a risk you get ‘stopped out’ of a good position,” Mr. Elfenbein says. How so? Flash crashes—or temporary drops caused by electronic trading glitches or errors—may cause a position to be sold when it would have been better to hold on.
I find myself agreeing with myself.
At Crossing Wall Street, I give investors my free and unbiased view of the market. I probably analyze dozens of companies every week. I’m always looking over income statements and balance sheets. I’ve spent several years collecting my list of the best companies to own. This is my current Buy List. I’ve included a description of each company and its current share price.
About Eddy Efenbien
I started this Web site to help individual investors.
I have to admit that I love the stock market. I think I must be an addict. In my opinion, the stock market is one of the greatest inventions in history. The stock market is simply the most consistently successful way to make money over the long term. Even after the financial crisis, stocks have still beaten every asset category over the long haul—bonds, commodities and real estate.
While the stock market may bounce around from day to day, and even month to month, the long-term trend has always been higher. Over the last 35 years, stocks have gone up 40-fold. And since the end of World War II, the stock market is up an amazing 130,000%. I wish I had been around! That was the beginning of an American financial revolution. Today, we’re at the beginning of a global financial revolution. That’s why I think the next 70 years will be even better.
The key to doing well on Wall Street is actually very simple: Buy and hold shares of outstanding companies. But too many investors never learn this valuable lesson. Or if they do learn it, they learn it the hard way. That’s where I come in. I want to help investors avoid the mistakes that separate successful investors from those who always find themselves spinning their wheels.
There are lots of pitfalls on Wall Street. From shady companies that are more popular than they are profitable to a mutual fund industry that’s more interested in its fees than serving investors. Today’s investors must be careful.
At Crossing Wall Street, I give investors my free and unbiased view of the market. I probably analyze dozens of companies every week. I’m always looking over income statements and balance sheets. I’ve spent several years collecting my list of the best companies to own. This is my current Buy List. I’ve included a description of each company and its current share price.
I don’t receive compensation from any of the stocks I recommend. Also, I don’t “short” any of the stocks I criticize. At any time, I may own the companies on my Buy List. All of the information on this site is free and unbiased. I also have a section for Frequently Asked Questions that will help you learn more about Crossing Wall Street.
Please feel free to e-mail me. I enjoy getting feedback from investors. I’m happy to give you my opinion on any stock or investing in general. I should warn you that I can’t give out personal portfolio advice, but all other topics are fair game. You can also check out some of my favorite links.
I hope you enjoy the site and visit frequently!
– Eddy Elfenbein
