Writes Pieter Lessing: “Fidelity does not allow stop-loss orders on NASDAQ stock, and could not give me a good reason why. So, to protect my profits in MSFT et al., I moved them to an online broker that does offer that type of order — and I saved a bit of money to boot. Question: help me understand why so many (discount) brokers do not allow stop-loss orders on NASDAQ?”
First, for those unfamiliar with them, stop-loss orders are a special kind of “good-til-canceled” order you can place with your broker and then more or less forget about. Say you buy 100 shares of CryoLaserComics (ICE), a highly speculative outfit trying to perfect the process by which comic book characters can be frozen and then brought back to life with lasers. It is a hot but volatile issue, as each new press release — POW! WHAM! OOF! — emerges from the lab. (Not to say this is a company whose lab develops press releases, only that they do try to keep the investment community closely informed.) So, figuring if it’s shot up from $10 to $26 there must be something good about it, you buy shares at $26. But having been told by people like me that you’re insane to do so — that you almost surely missed the speculative boat in this one, and who wants to revivify old comic book characters anyway? (other than Marvel, perhaps) — you figure you’ll play it safe and limit your possible losses. You could just make a mental note to keep your eye on the stock and sell if it ever dips below $24 or $25. But unless you have one of those things in your pocket that vibrates when one of your stocks moves, and even then, you could easily not notice the first screams as blocks of ICE stock fall out the window. So instead you do it the easy way. “And put in a stop at $25,” you tell your broker when you buy the shares, meaning that if they ever trade at $25, you want him to sell your shares immediately “at the market,” even if he winds up getting you less than $25 at that point. This is called a “tight stop,” because you’re not allowing ICE much room to fall — just a buck — before you kick it out. If ICE never dips on its way to 43, say (nevva happen!), you might then call your broker and raise the stop — to $37, perhaps — hoping to lock in much of your profit . . . but not setting the stop too tight, giving ICE room to dip without triggering a sale.
So that’s what a stop-loss order is. Tomorrow, I’ll tell you more about them. But today, let me just answer Pieter’s question.
Whether brokers accept stop-loss orders depends on the way they execute trades. Over-the-counter orders will frequently be sent to third-party market makers, several of whom do not accept stop-loss orders. This explains why some brokers will accept stop orders on New York and American Stock Exchange-traded stocks but not NASDAQ stocks, routed through different market makers.
(As always stated in the fine print below, I do not specifically endorse Ceres — any more than they endorse me — but in this context I did think I should check into their policy with regard to stops. “The market makers Ceres uses all accept stop-loss orders,” a Ceres spokesman told me, “so we can accept stops and stop-limits on all our orders.”)
Quote of the Day
In 1800, 75% of [an American's] working man's expenditures went for food alone. By 1850, that had dropped to 50%. Today it is a little more than 11%.~The Wall Street Journal, September 20, 1996
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