Given the nature of my favorite investment account I never felt the need to put in an order to lock in gains. If there was a dip I would see it as an opportunity to buy more and more of a stock that has increased dividends for the past 25 years. However, it is an entirely different story with the investment club. While I recently announced the club had an investment return of over 30% for 2013 we have a lot more of unrealized gains. During our meeting we discussed our collective desire to lock in some of those gains should the volatile industries we are invested in turn on us, but no real desire to sell out right this second. I volunteered to research our options.
Protecting Investment Profits Using Stop Orders
The definition of a Stop Order is,
An order to buy or sell a security when its price surpasses a particular point, thus ensuring a greater probability of achieving a predetermined entry or exit price, limiting the investor’s loss or locking in his or her profit.
As stated, we have some pretty ridiculous unrealized gains that we aren’t ready to just let ride uncontrolled if there is a souring of the particular industries we are invested in. Specifically, we have triple digit gains in the 3D printing and solar worlds.
The investment club has its assets with Fidelity, so since I have to place the trade there I turned to their FAQ on order types
According to Fidelity,
[A Stop Loss] order automatically becomes a market order when the stop price is reached. Therefore, there is no guarantee that your order will be executed at the stop price.
It took me a moment to figure out what they mean that there is no guarantee that it will be executed at the stop price? It has to do with the possibility that an equity may pass over your exact stop price, thus triggering the sale but lower than the stop price.
According to Fidelity,
[A Stop Limit] automatically becomes a limit order when the stop price is reached. Like any limit order, a stop limit order may be filled in whole, in part, or not at all, depending on the number of shares available for sale or purchase at the time
A stop limit avoids the gap in price issue, but also means your “stop” may be ignored in part or in whole.
Trailing Stop Orders
As the name indicates you can take either type of stop order above and have it automatically trail the market. It allows you the freedom to play the upside without have to constantly change your order. With Fidelity (I can’t vouch for all major brokers) the trail can be based on last exchange over 100 shares, bid price or ask price. That number can then be based on price or percentage. These types orders are not without computer error, and Fidelity has quite a few disclaimers trying to limit liability as to conditional offers.
The trailing stop loss order at 20% is what interested the investment club the most. This way we would keep our triple digit gains but relieve ourselves of having to scramble for votes if something caused an equity/etf to decline so dramatically. Since this was the first time I used a trailing stop loss based on percentage I double checked my work with Fidelity:
System: KENNY has joined this session!
System: Connected with KENNY. Your Reference Number for this chat is XXXXXX.
KENNY: Good morning Evan, thank you for contacting Fidelity today. How can I help?
EVAN: Hello Kenny.
EVAN: Doing good yourself
KENNY: I am doing great, thanks for asking!
EVAN: I had a question about 2 recent orders I put in – for reference this is the order number XXXXXXX
EVAN: Did a Trailing Stop Loss at $66.96 – 20% of last. Just want to make I fully understand how the trailing stop loss works
EVAN: I read the FAQ on it and I think I have it
KENNY: Okay, excellent. I am happy to go over that with you.
EVAN: But when does the order reset in terms of upside?
EVAN: maybe reset isn’t the right word, but adjust
KENNY: Every upward tick.
KENNY: It basically sets a high water mark. When the stock goes up above the previous high, it will pull the order up with it.
EVAN: So if KWT moves from 83 to 90 – that order is going to automatically adjust from 66.96 to 72?
KENNY: Exactly correct.
EVAN: Did you take a look at my order, did I put it in correctly?
KENNY: The price you see on the order page is the current trigger price. That will move if the stock goes up.
KENNY: Looking at it right now, both of these are set up to do exactly what you are describing.
EVAN: Fantastic, thank you appreciate it. I used loss vs limit b/c if it gets around that amount I’d like it to fill vs partial fill (i.e. market is fine since they are have pretty good volume and gap is unlikely). Is that the right way of doing it?
KENNY: Generally that is how I’d do it, the issue with a limit on trailing stop orders is that you do not get to set a second limit price, so if it falls to your trigger and keeps on falling, it will never sell. Most people don’t like that possibility.
EVAN: Perfect. Thank you Kenny
KENNY: My pleasure! Did you have any other questions for me today?
EVAN: Nope think we are good.
Ever use Stop Loss Orders before? What are some other ways you have used to protect gains? Do you prefer trailing or Current price only?