investing

Try limit orders to tame stock trading risk

Padula says limit orders can impose discipline on investors who are overeager to take a quick profit or to buy a stock. For instance, if you see a stock you bought quickly climbing up in price, instead of taking an instant profit, you may set a limit at a target that you believe will eventually be met.

The caveat is that investors must have a well-thought-out strategy on why they want to sell at a particular price. Investors can be excited at setting a sell target that leads to a satisfying profit, Padula says, but then they may be left with cash "where they don't have any good options on what to invest in again," he says.

Padula advocates looking at your entire portfolio and selling a stock not just to make a profit, but to allot to another promising investment that fits in well with your overall asset allocation plan.

Stop-loss and stop-limit orders

How they work: Anyone who's been investing for a few years probably has kicked themselves for holding a stock even as conditions caused it to spiral downward.

The "stop-loss order" is meant to prevent holding on to a loser, allowing an investor to set a point whereby if a stock slides to that price or below it, it triggers a sale, limiting a loss or protecting a profit on a stock. But the price that you'll sell at with a stop-loss order isn't guaranteed. The sale could go through at a lower price.

A "stop-limit order" works similarly, except that the sale won't go through unless the stock can be sold at the exact limit price.

For instance, if an investor puts a stop-loss order in on ABC Co. stock at $50, when the price slips to or below that $50, a sale is triggered. If the investor instead places a stop-limit order at $50, the order goes through if the price hits $50. But if the stock never trades at the $50 level and continues spiraling downward, the shares aren't sold. So there's no guarantee with a stop-limit order, either.

The downsides and benefits: Because the market has been very volatile, with big drops followed the next day with a similarly large gain, Safran is hesitant about advising investors to establish either a stop-loss or a stop-limit order. "You could trigger a sell when the (stock) drops 20 percent, for instance, and it might rebound," she says.

For those who may not follow stock movements closely on a daily basis, a better way to keep informed about when a stock may be dropping consistently is to establish alerts, Safran says. Brokerages commonly allow their customers to establish email or text alerts anytime a stock reaches a certain level, either up or down from where it currently sits.

"You could set up an alert at a price that's 20 percent lower. You could then investigate what is really happening to the market on that stock and then decide what to do," she says.

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