Dollars and Jens
Thursday, April 30, 2009
stop-loss orders and portfolio insurance
A "stop-loss" order is an order to sell a stock if it drops below a certain price; as with "portfolio insurance" of the eighties, the idea is to limit your downside. Of course, it doesn't work so well if you're selling at the same time as a bunch of other people, especially when there are few buyers, perhaps ahead of a major announcement.

I've read that stop-loss orders give up as much in rebound gains as they curtail in prevented losses, which is what the EMH would tell you, and doesn't mean they can't sculpt other moments of your returns' distribution, and so possibly add value. Don't think, though, that by selling as soon as the price breaches $20, that you're going to get $20 per share. Stock prices are not continuous.

Powered by Blogger