How To Protect Yourself In A Fast Market
| Money : Stocks And Shares The only sure fire way to protect yourself in a fast market is to stay out of it. If you feel you must trade during a fast market there are a few things you can do to protect yourself. Place a Limit Order When trading a volatile or new stock, you can reduce your risk by placing a limit order specifying the maximum you're willing to pay to buy a stock or the minimum you'll accept to sell a stock. Unlike a market order, which is an order to buy or sell at the best available price when the order is received in the marketplace, a limit order gives you price protection by ensuring you get your limit price or better. There's no guarantee your trade will be executed, but it's the most effective strategy for limiting your risk. A market order is an order to buy or sell a stock as soon as possible at the best price available. In a fast market situation, a market order can be very risky. A stop order is an order to buy or sell a stock when the price reaches or passes a specified point (the stop price). When that happens, a stop order automatically becomes a market order and is executed at the best price available. In fast markets, however, after a stop order hits the stop price and becomes a market order, it can keep climbing or drop sharply - and ultimately be executed much higher or lower than originally specified. A limit order is the safest way to trade in a fast market because it's an order to buy or sell a stock only at the specified price (the limit price) or better. Know What You're Buying What do you know about the company you're buying? Have you researched it? Buying a stock on impulse or hearsay isn't smart investing. Be sure the company you're buying a piece of is one you really want. Be Aware of How the Trading Process Works Educating yourself about investing is an ongoing process. If you're a new investor or need a review of trading procedures, pick up a book like The Wall Street Journal Guide to Understanding Money and Investing, take a virtual trip to the New York Stock Exchange on the Web at www.nyse.com (click on Education), or locate an investing club in your area through the American Association of Individual Investors at www.aaii.com. Stay on Track with Your Investment Strategy When you're considering a stock, first see if the company meets your investment objectives. If you haven't formulated an investment strategy yet, now is a good time to start. Begin by determining your goals and your time horizon, then choose the investments that will best meet them. Weigh the Risk . . . Before You Click Before you place a market order for a volatile stock, ask yourself how much you could afford to lose in the event of sweeping price fluctuations. Don't risk spending more than you can afford. Timing Is Everything If you're planning to place an opening market order, make sure your order is entered before 9:20 a.m. Eastern Time. Otherwise, your order may not queue until after the pre-open is completed. At the end of the day, enter market orders at least 10 minutes before closing or your order may not be executed.
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