Question

You own shares of a company that are currently trading at $ 80 a share. Your technical analysis of the shares indicates a support level of $55. That is, if the price of the shares is going down, it is more likely to stay above this level rather than fall below it; however, if the price ever does fall below this level ($55), you believe the price may continue to decline much further. You have no immediate intent to sell the shares but are concerned about the possibility of a huge loss if the share price declines below the support level. In addition, you believe that your concern is valid for at least a few weeks. What type of orders and would mostappropriately address your concern? Specify buy/sell, execution instruction(s) and validity instructions and explain why you choose them.

Answer 1

In the instant case investor is losing his money. His current shareholding is trading $80 per share, which in future may decline up to $55. It means there is probable loss of $25 per share. To mitigate such loss investor requires a strategy.

Strategy depends on loss bearing capacity and purpose of investment of investor.

1. If it is long term investment and company has prospects to grow than no need to get panic from short term fluctuation.
2. It is temporary investment than decision is required to taken immediately.

1. If there is some loss bearing capacity with investor.
2. If there is no loss bearing capacity with investor.

Types of orders which are appropriate in this case:-

                There are mainly seven types of orders exist in market i.e. Market Order, Limit order, Stop order, Stop loss market order, Stop loss limit order. All are described here:-

Market Order:- A market order is order to buy or sell stock at a current market price.

Limit Order: - A limit order is order to buy or sell stocks at a specified price.

Stop loss order: - A stop loss order is an order which gets activated only when the last traded price of the share is reached or crosses a predefined price.

Stop loss market order: - It has both qualities of market order as well as stop loss order.

Stop loss limit order: - It has both qualities of limit order as well as stop loss order.

Action need to take:-

1. If there is some loss bearing capacity with investor.
   1. Stop loss limit order with validity till cancellation.

Reason to choose: -- As investor can bear some loss. Bearable limit of loss bearing need to be identified and place such an order so that if prices of stock cross the lower limit order will trigger. By this way investor can hold sometime in the market and watch the market trend. Further he can limit the loss on stocks. Validity of such order must kept till cancellation so that if market goes upward and steady, investor can cancelled such order by himself and if stock prices goes down , order get executed.

2. If there is no loss bearing capacity with investor.
   1. Market order:- as it is instant executable no need of validity.

Reason to choose: -- Investor has short term goal and Investor has no capacity to bear loss, further market is sluggish, hence it is better for investor to sale current holding and keep money safe.