Drastically falling market prices, such as the ones we saw today, highlight the need for individual investors to use stop-loss orders.
Placing “stops” means that you are entering a limit order to sell your stock. The “limit” is the price that you want to have the order activate.
For example, assume that I purchased a stock at $50 per share. I also have a rule of losing less than 10% on every trade. This equals a maximum loss of $5 per share for my $50 stock.
After purchase, I would enter a second order; a sell order with a price “limit” between $45 and $50. For this example, I’ll use $46.
If the stock price fell below $46 per share, the order would activate and turn into a regular market order, and my shares would be sold.
This is just one method to limit your maximum loss, and a great way to gain peace of mind when the market is not cooperating.