If you’re an advisor implementing trading for clients, one of the most important things you will decide is what your sell point will be and how you’re going to execute when it’s time. The when and how of selling securities in your clients’ portfolios is something you need to decide early on.
Setting a point at which you sell may seem like a simple thing to do, but there are several ways to go about handling the trade that can make all the difference for you and your clients.
In the end, though, however you choose to handle the sell is up to you.
Market Orders vs. Limit Orders
The first thing to understand is the difference between market orders and limit orders, since they can have an impact on how and when your trade is executed and the price that your clients will ultimately pay.
Market orders are orders to sell at the current market price. This means that as soon as you place the order, it goes through. These often work best in large funds with heavy trading volume and narrow spreads, since a large, quick order is less likely to move them too much in any direction.
Limit orders are the more preferable option and give you more control over how a trade is executed. Unlike market orders, limit orders allow you to specify the price at which you’ll sell. If that price isn’t reached, the order doesn’t go through.
The benefits of limit orders are clear, especially in low-volume or high volatility ETFs.
Stop Loss Orders
Stop-loss orders are a little tool that can make a big impact on your trades. Stop-loss orders are, in effect, orders to sell a security when the price hits a certain point.
The stop-loss helps limit losses on a security position. For instance, a stop-loss order for 5% below the price at which the stock was bought will limit losses to 5%. The order will to sell once the stock reaches that point.
A few points of caution on stop losses, though:
- There is the possibility that the stop price could be triggered by short-term volatility of an ETF’s price – advisors should set a stop-loss percentage that allows some breathing room for day-to-day market volatility.
- Advisors who are juggling multiple orders and ETFs don’t have time to meticulously watch over each investment. This method helps those who can’t watch for an extended period. But in the automation, you give something up: control. That’s because once a stop price is reached, the stop order becomes a market order and the selling price may be lower than the stop price.
Stop Limit Orders
They may sound similar, but stop loss orders and stop limit orders are different things that can work together.