Every stock and mutual fund investment should
come equipped with a feature called a 'Stop Loss'. Unfortunately, most brokers
only have that feature available on some stocks listed on some stock exchanges.
Stocks listed on other exchanges, or those that do not have that feature at all,
do not have the capability of monitoring price fluctuations on behalf of the
consumer. This is unfortunate because many investors rely on other professionals
(analysts) to keep an eye on particular investments and notify them when it is
time to sell a particular issue. Just as is the case in many areas of life,
timing is everything.
A Stop Loss is the method used by a consumer
to establish a threshold when a stock should be sold. A Stop Loss should be
associated with each individual purchase, or issuance, of stock. When a stock is
purchased, a Stop Loss is identified based on the amount invested. Should the
stock price drop to the specified Stop Loss amount, then the Stop Loss feature
would automatically activate and the stock would be sold. Thus, the consumer has
cut his or her losses. During the performing life of a stock, a Stop Loss can be
set at any time by specifying a specific Stop Loss amount. Then, should the
stock drop to this amount, the stock would be sold.
A better method would be to have a way of
tracking a stock's value, and to allow the consumer to specify a Stop Loss
percent (versus amount). Then, any time the issuance drops, from its highest
value attained by the Stop Loss percent specified by the consumer, the consumer
would be alerted to the drop. In this manner, the consumer could have an entire
portfolio being monitored regularly and not have to keep submitting specific
threshold amounts in order to sell an issue. More importantly, this method
allows the consumer to lock in achieved gains and be notified to sell an
issuance before principal has to be given up. If a consumer has a particular
liking to a stock, the stock could always be purchased again when the price
levels off.
This same concept can apply to mutual funds.
The mechanisms currently available to monitor mutual fund pricing fluctuations
and to take corrective action on behalf of the consumer are minimal. The
individual has to be particularly careful the mutual fund does not have
restrictions on selling interests in a particular fund or restrictions on
withdrawing all or a portion of the funds from the mutual fund company. Some
mutual fund companies allow the consumer to move funds within the mutual fund
company, but penalizes them for withdrawals or investment in funds outside of
the mutual fund company.
Copyright 2002, 2004, Frank Jersey
Mr. Jersey is the General Manager
for 2050 Systems, LLC. 2020 Systems, LLC is a provider of Income Management
Applications Software for Consumers. For more information visit
www.2050systems.com or visit Mr. Jersey's retirement information site at www.someonesgottadoit.com.
