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Use Stop-Loss and Limit Orders to Your Advantage
Volatility in security prices are a natural part of the markets. You may wish to
use tools such as Stop-Loss and Limit Orders to manage your possible gains and losses.
We have provided a definition of these order types, as well as some examples of
how you might use these order types to manage your brokerage account.
Buying
Buy Limit Orders allow you to set a limit price at which you agree to purchase a
stock. For example, assume ABC stock is currently trading at $50 a share. You would
like to purchase ABC, but only if the share price drops to $45. One way to do this
is to enter a Buy Limit Order for ABC stock with a limit price of $45 per share.
This will tell MyStockFund to purchase ABC if it can buy the stock at a price of
$45 or lower.
Be aware that Buy Limit Orders will trigger a real time order (not a planned purchase),
and as such you can only purchase whole shares with this order type. Also, whenever
you enter a Buy Limit Order you will be asked the specific number of shares that
you want to purchase, the price, and when the order "Expires."
The expiration election indicates how long you want the order to be in effect. You
must make one of three expiration elections. Your choices are: "Today," or "End
of Month," or "Good Until." Selecting "Today" restricts the possible purchase transaction
to the market hours of that day that you entered the order. "End of Month" restricts
the possible purchase transaction to the days and hours that the markets are open
during the month that you entered the order. "Good Until" will leave that order
open until a specified date (to a maximum of ninety days) and, if the purchase order
does take place, it will be placed during market hours. Note that you will not pay
a purchase transaction fee unless and until a transaction takes place.
Selling
When you do decide to sell stock, MyStockFund makes it easy. You can choose to enter
an order to sell the stock right away, or you can enter a Limit or Stop-Loss order.
Limit orders enable you to set a price at which you want to sell a stock. The limit
price is set above the stock's current share price. If the stock's share price reaches
the limit price, your stock will be sold at the limit price, or better, so long
as there is sufficient trading volume. Stop-Loss orders enable you to set a trigger
price at which you agree to enter a market order to sell your stock. The trigger
price is set below the current share price. If the stock's share price reaches the
trigger price, a market order to sell the stock is entered. Keep in mind that the
market order could be filled at a share price that is at, above, or below the trigger
price. Both Limit and Stop-Loss orders are typically used by investors to achieve
or preserve a specified gain.
Sell Limit Orders
Sell Limit Orders allow you to set a limit price at which you agree to sell a stock.
For example, assume you own 10 shares of ABC stock that is currently trading at
$50 a share. You purchased the stock at $45, and if it goes up to $52 you would
be happy to sell it. One way to do this is to enter a Sell Limit Order for ABC stock
with a limit price of $52 per share. This will tell MyStockFund to sell ABC if it
trades at $52 or Higher.
Stop-Loss Orders
Stop-Loss Orders allow you to set a price at which you would like to enter a market
order to sell your stock. They are typically used by investors who want to limit
their losses or preserve their gains. For example, assume you own 10 shares of ABC
stock, and it is currently trading at $50 a share. You purchased the stock at $40,
and if the price drops to $45 you would like to sell it in order to preserve your
gains. One way to do this is to enter a Sell Stop-Loss Order for ABC stock with
a trigger price of $45 per share. This will tell MyStockFund to enter a market order
to sell ABC if it trades at $45 or below. This does not guarantee a sale price of
$45, but rather we will send your sell order to the market to be filled. The actual
trade price could be higher or lower than $45.
Be aware that Sell Limit and Stop-Loss Orders will trigger a real time order (not
a planned purchase), and as such you can only sell or purchase whole shares with
these order types. Also, whenever you enter a Stop-Loss or Sell Limit Order you
will be asked whether you want to sell your whole position, or a specific number
of shares. You will also be asked the price, and when the order "Expires."
The expiration election indicates how long you want the order to be in effect. You
must make one of three expiration elections. Your choices are: "Today," or "End
of Month," or "Good Until." Selecting "Today" restricts the possible sell transaction
to the market hours of that day that you entered the order. "End of Month" restricts
the possible sell transaction to the days and hours that the markets are open during
the month that you entered the order. "Good Until" will leave that order open until
a specified date (to a maximum of ninety days) and, if the sell order does take
place, it will be placed during market hours. Note that you will not pay a sales
transaction fee unless and until a transaction takes place.
Variations in securities prices are an inherent part of the market, and using tools
such as Stop-Loss and Limit Orders is another way that you can be an educated investor.
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