Buying and Selling
A market order is the most common type of order where you put in an order to buy or sell a stock at the best available price. Most times, these types of orders execute instantaneously. The price at which your order executes is not guaranteed. By placing a market order you are putting yourself in line for the next available trade. If there are many others ahead of you, the price could be higher or lower than the current market price.
In fast-moving markets, the price at which a market order executes is often much different that the last-traded price or “real time” quote. Be especially careful of placing market orders when the markets are not open. For example, a stock could have closed at $50 /share at 4pm on a Tuesday. If you place your order after the market is closed for the next day, things could have changed significantly for that company, the sector it operates in, or general market conditions. This means the stock could open up significantly higher or lower than its closing price.
Limit orders help protect against some of the uncertainty of the markets. A limit order is an order to buy or sell a stock at a specified price (or better). A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. A limit order does not guarantee that your order will be executed. A limit order can only be filled if the stock’s market price reaches the limit price. While limit orders do not guarantee execution, they help ensure that an investor does not pay more than a pre-determined price for a stock or get less than their limit price when they sell.
Stop Loss vs. Stop Limits
At Wall St Renegade, we typically recommend using a stop loss 20-25% below your entry price. However, sometimes stop limits can be helpful. Let’s look at the basic differences:
With a stop order, your trade will be executed only when the security you want to buy or sell reaches a particular price (the stop price). Once the stock has reached this price, a stop order essentially becomes a market order and is filled. For instance, if you own stock ABC, which currently trades at $20, and you place a stop order to sell it at $15, your order will only be filled once stock ABC drops below $15. Also known as a “stop-loss order”, this allows you to limit your losses. However, this type of order can also be used to guarantee profits. For example, assume that you bought stock XYZ at $10 per share and now the stock is trading at $20 per share. Placing a stop order at $15 will guarantee profits of approximately $5 per share, depending on how quickly the market order can be filled.
Stop orders are particularly advantageous to investors who are unable to monitor their stocks for a period of time, and brokerages may even set these stop orders for no charge.
One disadvantage of the stop order is that the order is not guaranteed to be filled at the preferred price the investor states. Once the stop order has been triggered, it turns into a market order, which is filled at the best possible price. This price may be lower than the price specified by the stop order. Moreover, investors must be conscientious about where they set a stop order. It may be unfavorable if it is activated by a short-term fluctuation in the stock’s price. For example, if stock ABC is relatively volatile and fluctuates by 15% on a weekly basis, a stop loss set at 10% below the current price may result in the order being triggered at an inopportune or premature time.
A stop-limit order is an order to buy or sell a stock that combines the features of a stop order and a limit order. Once the stop price is reached, a stop-limit order becomes a limit order that will be executed at a specified price (or better). The benefit of a stop-limit order is that the investor can control the price at which the order can be executed.
Trailing Stop Orders
A trailing stop-loss order is simply setting at a percentage level below the market price (such as 10%). This can only be placed once you already own the stock. You must first buy the stock then place your trailing stop order. The trailing stop price is adjusted as the price of the underlying stock fluctuates. Trailing stop orders can be placed as trailing stop limit orders or trailing stop market orders.
The Ins and Outs of Buying and Selling
I was never one to sit still. At church, school, and even while I was eating or sleeping, I would squirm and wiggle like a worm, constantly making excuses to get up and get out! To this day, I can vividly remember my mom saying, “Patience is a virtue.” Patience is a what? I thought. It sure didn’t sound like anything I needed, and off I went!
It wasn’t until I started my investing career that I learned the real virtue of being patient. In fact, I admit I learned patience the hard way—by making my move on a stock way to early or way to late, many a time.
The most difficult decision an investor has to make is when to buy, sell, or hold a stock. Although it goes with-out saying, making a great investment decision requires extensive research, learning essentially everything possible about the company: its products and services, innovation, research and development activities, management and their operating habits, numbers, statistics, and every little financial detail, the company’s history, present and future outlook, affiliations, setbacks, and so on and so forth. Buying a stock may be the easiest part of the investing equation, but that’s only if you’ve exercised due diligence.
After you have patiently analyzed a company forward and backward and then again, the next major hurdle is deciding when to buy and at what price. Once again patience plays a key role here.
The key is patience!
Now let’s say you do your research and decide that you want to buy J.M. Smucker Co. (SJM). Your research points to an optimum price of $100 but the stock is currently trading near $107.39. You may be able to maximize your chances of getting a lower average price for SJM, by buying different lots, as the stock fluctuates down and back up again. In this example, let’s say you buy a third of the total amount you have allocated for SJM right off the bat at $107.39 a share. Then, using patience, you wait for the stock to drop, and when it does you pick up another third at $102. At this point the stock starts trending back up, so you buy another third at $104. This example would give you an average cost for SJM of $104.46 per share.
By far the hardest investing decision to make is when to sell a stock. I have to stress here: please think twice before you sell, as selling a winning stock too early has haunted many investors throughout history. Just for an example, let’s follow what happened to David early on in his investing career. In 1990 David had $2000 to invest, so he decided to buy $1,000 of Dell stock (NASDAQ: DELL) and $1,000 of Wal-Mart stock (NYSE:WMT). Over the next 3 years, both stocks did very well. However, from 1993 to 1995 both stocks traded relatively flat to down, and thus David got bored with the investments and decided it was time to sell both of them, which he did in January 1995.
He did quite well, too, as his Dell investment went from $1,000 to just over $14,000, and his Wal-Mart investment grew from $1,000 to nearly $2,000. However, five years later, David realized he had made a terrible mistake as both stocks kept climbing and never looked back. Had David held on to those shares for just another five years, his Dell stock would have been worth more than $900,000 and his Wal-Mart stock worth nearly $13,000. Again, think twice before you sell!
I know what you are thinking: Most stocks do not deliver the incredible returns of Dell or Wal-Mart. True, but there are quite a few (and I can show you literally hundreds) that have, and you just may be holding one of these future millionaire-makers.
To avoid missing out on these potential opportunities, some investors sell only a portion of their stocks, reinvesting what they sell and letting the rest ride.
Before selling a stock:
If you are unsure of what to do, here are a few key questions to ask yourself before selling a stock:
- Have you lost enthusiasm for the company, its products or services?
- Is the company really struggling or is the current lack of performance fixable?
- Is management fiscally responsible, committed to renewing growth and creating value for shareholders?
- Is the company improving existing products and services, inventing new ones, or spending more on research and development?
- Is the stock price capable of pushing even higher or outrageously overpriced?
- Is the company taking on way too much debt, burning through its cash pile?
- Has the market(s) for which the company operates within turned sour with no recovery in sight?
Remember, patience is virtue! Just sit back and relax, no wiggling or squirming, please, and make a well-thought-out wise decision. You will likely be much better off.