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Question: Where can I find a definition and/or discussion of "stop loss order"? Does BUYandHOLD offer stop loss order? If so, what is the fee?

Thank you,
Del Anderson

Answer:

Dear Del,

Well, just so your question doesn't turn out to be a total loss, we are giving you something that will stop all your financial problems -- if you have any! Because you are the 200th BuyandHolder to ask a question in this column, we are sending you a copy of the latest edition of my book, "How To Invest $50 To $5,000." Congratulations on being our winner!

Now back to your question...

The Definition of Stop Orders

When you place a stop order, you are instructing your broker in advance that he or she should buy or sell a stock when that stock's price reaches a certain target price. That price is known as the stop price.

When a stock reaches that target price it then turns into a market order and the broker then gets you the best possible current price. (Most orders are simply market orders.)

There are two types of stop orders: a stop order to buy is placed above the current market price while a stop order to sell is placed below the current market price.

Why Place Stop Orders

Investors place stop orders in order to limit their losses or protect their profits. Let's look at an example. Say you bought a stock at $20 per share and it then goes up to $50 per share. You put in a stop order to sell at $40. That way you are assured of at least making a $20 per share profit because your shares will automatically be sold at $40.

On the other hand, let's say you buy a stock at $30 and put in a stop loss order to sell for $25. The stock falls to $10. With your stop loss order in play, you save $15 per share.

$TIP: It's not smart to set a stop loss order that is too close to the current price. Doing so gives you very little room to recovery from what may be just a temporary decline in value. The rule of thumb (which is not 100% accurate) is one should set a stop loss order that is 15% to 20% below the stock's current price.

At BUYandHOLD

Here at BUYandHOLD, you cannot place a stop order. Trades can be placed during one of the three trading windows at 10:00 AM, 12:30 PM, or 3:00 PM. You can also choose to make a real-time buy or sell order for $15.00 per trade.

Good luck!

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