Retirement & Financial Planning Report

Limit orders (see above item) also can be used on the sell side. You might, for example, set target prices for stocks you own, placing limit orders to get out at those prices. At the same time, you can place “stop-loss” orders. Say you buy a stock for $80; you might want to enter a stop-loss order at $70, to limit your downside in the stock. Many investors are reluctant to take losses, so using stop-loss orders can be an effective way of removing emotional barriers. You can sell, take a tax loss, and reinvest in another stock that may offer better prospects. One strategy is to raise your stop-loss order if the stock moves up. Suppose, for example, that $80 stock mentioned above goes up to $100. You might raise your stop-loss from $70 to $90, to lock in a gain from your original $80 purchase price. If the stock keeps moving up, you can keep moving up your stop-loss order.