Sheryl Garrett, CFP
Sheryl Garrett, CFP, founder of Garrett Planning Network, a nationwide network of fee-only planners based in Eureka Springs, Arkansas. GarrettPlanningNetwork.com
Buying low and selling high is the goal with stocks, but unfortunately, we sometimes end up doing just the opposite. Knowledgeable investors use a few automated tricks to help improve their odds. How these tricks can help you…
A buy-limit order allows you to automatically buy shares of a stock if and when they hit a predetermined price. Stocks often fluctuate 1% to 2% within a day, and fast-moving stocks can drop by as much as 3% to 4% before bouncing back. A buy limit can help you catch the lower end of the price range.
Example: Last spring, I decided to invest in Citigroup. I noticed that the stock’s trading range in recent days had moved between $1.17 and $1.70. I put in a buy-limit order for $1.20 per share, which saved me as much as 50 cents a share. That adds up if you are buying hundreds or thousands of shares. Citigroup has since rebounded to as high as $5.23 a share. Of course, if a stock price is shooting straight up day after day, this trick doesn’t work, but that’s rarely the case.
What to do: Go to http://Finance.Yahoo.com, type in the symbol of the stock you want and you’ll see the high and low share-price range for that day. Or if you are dealing with a broker, ask him/her for the day’s range. Choose a buy-limit price a few cents higher than the low of the day.
Reason: Stocks often approach their lows of the day and then turn back up. You often will miss executing your order if you set it at or below the low of the day. Use a buy-limit order only if you are willing to miss out on buying the shares altogether — otherwise use a straight market order, which means you will buy immediately.
A stop-loss order allows you to automatically sell shares of a stock if they drop to a predetermined price.
Example: I had a client who bought Bank of America stock in October 2008 for $20 per share. It rebounded to nearly $25 per share, and many investors thought it had avoided the worst of the financial-sector meltdown. But my client wanted to protect some of his profits, so he set a stop-loss order for $22 per share. By March 2009, Bank of America had plummeted to $3 a share. My client had turned a potential catastrophe into a small profit.
What to do: I generally set stop-loss orders at 10% below my purchase price for stable, blue-chip large-caps… 20% for smaller or more volatile stocks. This strikes a reasonable balance between not selling on every short-term market swing… and cutting my losses before they really damage my portfolio.
If I put a stop-loss order on a stock and the price rises, I reset my order with my broker every time the stock goes up by 10% or 20% above my initial price.
Example: I bought Google at $380 per share in February 2009 with a stop-loss order of $312. The stock rose to $470 per share by September. I expected it to go higher but wanted to protect my downside, so I set a new stop-loss order for 20% below $470, or $376.
For both the buy limit and the stop loss, you need to indicate the time limit that your order will be in effect. A good-till-canceled order stays in effect until it is executed or until it reaches a specified time limit, which some brokers cap at 30 days. A day order keeps your order in effect only during that trading day, in case you want to reconsider your instructions the next day.
