Stop Loss Concept
Here is a quick summary of using “Stop Losses” that I am advising clients with individual stock holdings to use to help mitigate risk and attempt to capture any profits. The Stop Loss concept is quite simple that we can put a target percent or dollar sell price under each stock in your portfolio based upon your cost basis or current market price of the shares of stock you wish to capture any gains.
For example, if the lowest percent decline that you would want to see any individual stock value go down is 15% from your initial purchase price then we could employ this strategy in an attempt to achieve that. If we bought Apple stock as our example trading at $100 a share and you wanted to attempt to limit your loss at 15%, we would put an automated sell order in the system to sell Apple stock at $85 a share which is called a “Stop Loss” order. This order would stay active in the system until the price is triggered. If the price is triggered, it becomes a market order and sells for the next available price, which could be higher or lower than the stop loss price.*
The hope is that the stop loss price would never be triggered and Apple stock would go up in value over time and we would adjust the stop loss price higher as the price moves up in value. This active management approach gives you the opportunity to potentially lock in profits if the stock starts to pull back from those new higher levels, hence the ability to capture profits in a rising stock market.
For Example: If the price of Apple from the example above were to go up to $130 a share, we would adjust your “Stop Loss” price to $110.50 a share based upon a new 15% target to attempt to capture a net profit of $10.50 per share of Apple stock.
Proactively as we review your portfolio, we would manually adjust the stop losses with your input looking at stocks that have appreciated in value and adjusting the new stop loss price in the system. You as the client would confirm all changes. Using simple stop loss strategies, you can attempt to limit losses and you may not have to ride your portfolio of stocks completely down through a negative market cycle of 30% to 50% like we saw through the tech bubble of 2000-2001 or the recession of 2008-2009.
Stop loss orders are available within the Ambassador managed account platform at no additional cost to our fee structure. This is just a very general overview, but is something that I hope gives all clients more confidence to own individual stocks.
In 25 years as an advisor, I view this as a simple but effective way to offer a risk management strategy for clients that goes unused for the vast majority of investors.
“Building More Intelligent Portfolios”
*Some risk is associated with stop loss orders. Your captured gain or lack of loss is not guaranteed. Especially when the price starts to drop dramatically. Stop prices are not guaranteed execution prices. When the stock price hits the stop price, it becomes a market order. That market order will execute at the best available price, which could be substantially below the original stop loss price, potentially resulting in a much larger loss than your targeted percentage. Risks include no market for the stock, failing market, no guarantee of any price on the downside. Stop orders may be triggered by a short-lived dramatic price change. Stop loss orders do not guarantee protection against a loss. In particular, during volatile market conditions, these orders may be executed at prices significantly below the :stop price" set.