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.
Stop limit orders can be used in conjunction with a stop loss so you have, in effect, an order for two prices: the stop loss is the price at which you want to sell, the stop limit is the price below which you will not sell.
For example, your stop loss point can be $25 and if your position hits that price or lower, it will sell. But if you have a stop limit order for $24 in place, your order will only go through as long as the position is between $24 and $25.
The point of a stop limit order is to prevent sudden and unexpected volatility in the markets or certain position from resulting in unintended trades and pricing.
Whatever type of trade you choose to use, you need to watch to ensure that the trades are actually executed, since there’s no guarantee that they will go through. The benefit of limit orders, aside from saving you and your clients money, is that they protect you from volatility in the markets that lead to pricing inefficiencies.
Working the Trade
Once you’ve decided to make the sell, the next question is how and when you’re going to get it through.
Consider the timing of your trade. Avoid doing it at the market open or close, because the spreads tend to be higher while the liquidity is lower. Ditto for when foreign markets are closed.
Also consider the time frame of the execution. Your first option is to have it go through immediately with a market order. But with limits and stops, you can keep the trade open for just the day until it’s executed.
The next option is to use a Good ‘Til Canceled (GTC) order, which means that the order for your trade will be in place until it goes through or you cancel it.
Lastly, there are immediate or cancel orders. That is, if you cannot trade a security at the price you want immediately, the order is canceled.
You should also consider what’s most important to you: price or speed. This will ultimately determine how and when you sell.
For all of the trades, you can do a block trade in which you push all the trades through, then allocate them to the subaccount and do average pricing for all clients.