Stop Loss Orders – Good or Bad Idea? – Boca Raton, Florida FINRA Arbitration and Securities Litigation Attorney

We have discussed on or website what a stop loss order is and what are some of the risks associated with its use. The purposed of this post is to give you some food for thought concerning whether or not their use is generally a good or bad idea for you, the investor.

Many U.S. investors use stop loss orders to, among other things, protect gains if they or their investment advisors don’t monitor their holdings regularly. However, some market professionals assert that investors do not understand how dangerous a stop loss order can be in today’s markets. That is because stop losses may be executed before a stock rebounds when there’s abnormal trading. The shares also might be sold at the next available price, which may be far lower than expected. They’re especially dangerous when a stock closes at one price and opens lower the next trading day due to news that breaks overnight or during a weekend. One such circumstance was the decline on May 6 that briefly erased approximately $860 billion in value from the equity market in about 20 minutes.

“A staggering total of more than $2 billion in individual investor stop loss orders is estimated to have been triggered during the half hour between 2:30 and 3 p.m. on May 6,” U.S. Securities and Exchange Commission Chairman Mary Schapiro said in a September 7, 2010 speech in New York. “The broad market indexes dropped more than 5 percent in five minutes, only to rebound almost entirely in the next 90 seconds,” Schapiro said.

Consequently, the question that each investor must ask themselves is what is more important, protection on the downside, retain control over the positions so that you have an upside potential or at least get back to the original price before the sell-off. My personal opinion, for what it is worth, is that older investors cannot take the risk. If the decline is triggered, in an investor’s stock, for other than an unexpected general market decline, can an elder investor take the chance that the decline was not caused by a change in the fundamentals of the company itself. I don’t believe so. What do you think?

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