Building a successful investment portfolio relies on choosing the best stocks to perform. You want to maximize gains and minimize losses, and this may not always be a clear path with some stocks. Stop-loss orders are valuable options for your investment toolbox.
What are Stop-Loss Options for Investments?
When you purchase stock from a broker, you can arrange for a stop-loss order that tells the broker to sell or buy a stock should the value reach a certain point. The stop-loss option minimizes your losses on uncertain investments without your needing to constantly watch the performance. You can set a specific price for this type of order, or you can use a percent of the current price.
How Does a Stop-Loss Order Work?
The broker buys stocks and flags the transaction as a stop-loss order. The details include the price point at which you want to sell the stock to minimize your losses. When the price dips down to your set point, the stocks are sold. You do not need to watch the performance of your stock to know when to sell, as this is all handled by your broker.
When to Use the Stop-Loss Option
The best time to use a stop-loss option is when a stock holds promise, but has unstable performance or is unpredictable in other ways. If you are uncertain about the benefits of using the stop-loss option, a broker can explain the stock’s performance and potential for gains in the near future. You may also want to consider the stop-loss options if you are new to investing, have limited funding, or cannot afford to lose any part of your investment. The option may also allow you to invest in high risk, high return stocks that you would otherwise avoid.
Downside of a Stop-Loss Investment Option
Stop-loss options for stocks do have some disadvantages. The main issue that you should consider is that your stock will be sold at any time that the price reaches your threshold, regardless of how long the stock stays at that threshold. Therefore, your stock may be sold during a short-term drop in price that is followed by an increase in price. Should this happen, you may need to re-buy the stock using another stop-loss option.