Have an investing question for Jim and our team of analysts? Send it directly to the Mailbox at [email protected] . We have received a lot of questions in recent weeks regarding the use of stop-loss orders for selling shares. Here are just a few: What do you think about the use of stop-loss orders? — Thomas H. Hey Jim, Love the work you do. My question is why do you simply sell shares to trim a winning position? Why not set a stop or trailing stop in case the position has more room to run? Thanks and regards. — Bruce M. I am curious why don’t you use “stops” and let the winners run? — Tony Jim, Do you recommend setting stop limits on stocks? — Ron I. The short answer is we don’t use stop-loss orders at the Club. We only use market orders when buying or selling shares. As a reminder: A market order is used to buy or sell a specified number of shares at the next available price. A stop-loss order includes a predetermined price that when (or if) hit converts to a market order. For example, stock XYZ is trading at $100 and a stop-loss order is placed at $99. This means the order to sell converts to a market order the moment a $99 trade is registered. The shares will then be sold at the next available price. We dislike stop-loss orders because if there’s a big gap down — meaning the stock opens at a lower price than it closed at the day before — you get stuck selling at the lower price. It hurts even more if you see the stock bounce back after the open. In a volatile market where bid-ask spreads are wide and prices are gapping up and down, stop-loss orders can be very risky. For instance, going back to our first example: If you went to bed with that $99 stop-loss order on stock XYZ and wake up the next day to see shares have gapped down, you will be forced to sell at a price far lower than you expected. If those shares open at $80 because of some event or news overnight, the breach of that $99 level has left you with a market order on the books, meaning shares will be sold at next available price ($80). One option to prevent that sale at $80 is a what’s called a stop-limit order. In this order type, two parameters are provided: a stop-loss price and a limit price. Whereas the stop-loss order will convert to a market order once the stop-loss price is hit, this order will convert to a limit order. If XYZ is trading at $100 and we enter a stop loss at $99 and limit at $98.50, we know that once the $99 level is reached, a limit order will be entered for $98.50. This means that shares will be sold at $98.50 or better but that no shares will be sold should the price move below that limit. It can also result in a partial order placement, for example, if your sale was for 500 shares, and only 250 were able to be sold for $98.50 or better, you would still be sitting on 250 shares as the limit order was not able to be completed given the parameters. Of course, if shares were to gap down to $80 at the open, no shares would be sold due to that $98.50 limit. But you own lower-priced stock that you wanted to sell at a higher price. We do understand some investors like using stop-loss orders for risk management. For example, you could put a stop-loss order slightly below a 200-day-moving average with the thinking that if the stock falls below technical support, it could head even lower. There are also plenty of other types of orders, depending on where you do your trading. But at the Club, we prefer to stick with market orders for all our trades to get the best possible prices. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Have an investing question for Jim and our team of analysts? Send it directly to the Mailbox at [email protected].
We have received a lot of questions in recent weeks regarding the use of stop-loss orders for selling shares. Here are just a few:
- What do you think about the use of stop-loss orders? — Thomas H.
- Hey Jim, Love the work you do. My question is why do you simply sell shares to trim a winning position? Why not set a stop or trailing stop in case the position has more room to run? Thanks and regards. — Bruce M.
- I am curious why don’t you use “stops” and let the winners run? — Tony
- Jim, Do you recommend setting stop limits on stocks? — Ron I.
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