Forum Archive Index - August 2000

[Rhys Lewis <rhys.lewis@zivo.co.nz>]

Looks like we're all sleeping today.  I'll answer this, although there seems
to be a delay with my email, so someone's bound to have answered it already!

A stop loss is simply a request you make to your broker.

So for example if I bought some TEL @ $6.90, and I figure that I want to
sell them again automatically if the price drops more than 10%, I would tell
the broker to buy at $6.90 and to sell again if the price drops below $6.83.
This is just a conditional sell order which you should be able to make
without any cost.

However if the price climbs above $6.90 you might want to adjust the stop
loss order, so you would call the broker and crank it up a little, following
the rise in the price, and eventually the stop loss will automatically sell
for you once the share has risen and then started to fall.  (sounds good in
theory!)

If you use an Internet based broker you can usually place conditional orders
that don't even go through to the broker until the conditions are reached.

So a stop loss is a safety net that you put beneath the share to prevent you
from losing too much on the downside.  The theory behind it is that your
natural inclination is to sell as soon as you see a profit and to hang on
for grim death if the price drops.  This of course is an effective profit
minimisation method.  Using the stop loss cuts your losses short, and allows
your profits to run.  If rises and falls are equally likely, and you only
exit on 10% falls you should win more than half the time.  But reality has a
way of laughing at statistics...

The bottom line is that peaks are notoriously difficult to spot, and by
definition are times of low liquidity, so they are hard to trade on.
Selling over the crest is much easier.

Rhys Lewis

-----Original Message-----
From: Sue McLellan [mailto:mclellan40@hotmail.com]
Sent: Tuesday, August 22, 2000 11:22 PM
To: sharechat@sharechat.co.nz
Subject: [sharechat] stop losses


Can anyone tell me about stop losses and how much they cost.  I'm thinking 
it may be a good idea for ROCOM.
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