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The business of investing in stocks is definitely an inventory “buying & selling” company. Naturally, the businesses that promote stock towards the public want you to buy and hold it forever in order to maintain its value. But if you are buying without having any selling, you are literally driving with out any brakes. That can be a horrifyingly unsafe position for your principal. The most effective defensive brake program for your cash can be a stop-loss order on your stocks.

A stop-loss order is definitely an order you give your broker to sell your shares if a stock falls below a certain price. You can select a stop-loss price for your stock based upon chart patterns or a percentage drop from your purchase price. And some brokers automatically move them as a stock moves up in price to lock-in profits for you.

The first time I learned this lesson (not the last unfortunately), I was just 18 years old. A single of my early stock purchases, recommended by a stockbroker from a famous brokerage firm, was stock in a famous airline – just before it trailed off into bankruptcy. Had I read this article before the airlines’ economic calamity, I would have rescued most of my $5,000 and prevented my own economic calamity.

But you cry, “The greatest investor Warren Buffett is a buy & hold investor!” No, I’m afraid he is not. Mr. Buffett mainly buys whole firms or controlling interest in a business. He buys control so that if there are problems with the organization, he can hire/fire/make changes. If there are critical problems with the company whose stock you very own, the only control you have to protect your principal is always to market.

When a public business goes bankrupt, 70% of the time the shareholders receive no cash at all. How many stocks do you want in your portfolio worth $0? I know exactly how many that I want, and I know that stop-loss orders prevent it from happening.

There are a few “loss-recovery” methods, but you’ll never promote enough covered calls to recover from a stock trading under $5, or be capable to buy puts on a stock which has been de-listed from an exchange. But the nearly certain protection would be to place a stop-loss order on the stocks you own. You are able to choose any percentage loss amount (5%-25%) based on your knowledge, but you ought to have a stop-loss order in place to protect your capital.

There a zillions of old stock market sayings. Here is 1 of them for those of you who are still skeptical, “If the smart-money has sold and moved on, what type of money still own the stock?”

You can find more information about 50 top stocks, stock exchange holidays, and best short term stocks

Tags: investing tips, investment, investment ideas