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What is a stop-loss order?

I am trying to improve my investing skills and I often hear about traders using a stop-loss order? What exactly is it? Why would use it? And if they are worthwhile using how do you go about doing it?

A stop-loss order is an instruction to a broker to sell a share you own when it reaches a certain price. It’s designed to limit an investor's loss. Setting a stop-loss order for say 10 per cent below the price you bought the stock for effectively limits your loss to 10 per cent. This strategy allows investors to determine their loss limit in advance, preventing emotional decision-making.

It's also a great idea to use a stop order before you leave for holidays or enter a situation in which you will be unable to watch your stocks for an extended period of time.

In terms of how you do it, it’s simply a case of telling your stockbroker and when and if the share price tumbles the broker should spring into action and sell the stock on your behalf.

As you can see, this strategy makes a lot of sense particularly if you’ve made a lot of money out of a share and you suspect the market could move against it. It also adds another strategy for those long-term investors who like to hold companies but don’t want to be set-and-forget investors.

You could think about being a dollar cost averager if you want to keep good companies’ stocks, which means you buy the stocks you hold when their prices fall. By buying stocks at lower prices, you effectively reduce the average price of purchasing these stocks.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Thursday, March 10, 2011

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