With Julie Stav

Dear Ernst,
Many stock investors sell at the wrong time simply because they can’t be watching their investments during the trading day. And I can’t say I blame them; I know too well how horrible it feels to boot up my computer after a long travel day only to find that my stock has tanked and my profits have turned into a sea of red ink. But bleed no more. Here’s how you do it.
When you place a market
order, you are instructing your broker to buy or sell a specified number of shares at the current price. Once the transaction occurs, you are notified of the actual price you paid or received for your shares and your account gets adjusted accordingly, taking into account the commission charged by the brokerage house.
But your broker may offer what is called a stop loss order, which allows you to place instructions to sell your stock if it reaches a price set by you. For example, you may own a $50 stock and you could place a stop loss order to sell x amount of shares with a stop loss order at $40. If the stock reaches that price, the order activates and becomes a market order. Your shares will be sold at the best going price at the time, which could be higher or lower than the actual $40 you selected.
There is also a special order type called a trailing stop. With this order, you can specify a drop in price by using percentages. If your stock is selling at $50 now and you place a 10 percent trailing stop, the order will become activated if the stock reaches $45 ($50 minus $5). Once activated, it becomes a market order and you will receive the current price for your stock, which again could be higher or lower than the 10 percent trailing stop you placed.
The beauty of this system is that a trailing stop is a floating number. As the price of the share increases, so does the price at which it will be sold. If it goes to $60 a share, the sale will become active at $55 and so on. This process allows you to let your profits run while you prepare to cut your losses.
When you place a trailing stop order, remember to set the specific time you wish to have it on the books and don’t forget to cancel the order when you no longer need it. You may choose to have it for one day, until a particular date, or until you cancel it. The commission is charged when the actual shares are sold, and not when you place the order, so if you cancel it before it becomes active, there is no charge.
What that means to you, and all those investors that are not able to police their holdings during the day, is that you can actually have a “watchdog” looking out for you.
Some people call the trailing stop price the “point of maximum pain” because it represents the lowest price you are willing to endure before you press the sell button. In any case, it sure feels a lot better to know that you can contain the losses and lock in the profits you may have had.

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