Time to stop on stop losses?
Some brokers and most spread betting firms now offer automatic stop losses of one kind or another - that is, if a price hits your stop loss they sell your position automatically. Sounds like a good idea in theory but in practice is it really?
Many e-mails I'm getting suggest it might be wise not to use these facilities.
Spread firms currently offer two kinds of stop losses. Let's say you bought BSkyB at 500p but wanted to set a stop loss at 480p. With a spread firm you could set a guaranteed stop loss. This means you would definitely be stopped at 480p however low the share price went.
Or you could set a normal stop loss. If BSkyB opened the day much lower at 460p, you'd be stopped out at around that figure. With a guaranteed stop loss you get the 480p whatever happens. You pay more on the spread for a guaranteed stop loss.
Some brokers offer a stop loss service although they don't generally guarantee to get you out at the price you want. But are these stop losses a good way of cutting a loss without emotion, or are they the way to the poor house?
The trouble many investors face is that when the market is very volatile their stop losses get activated on a price that hardly really existed for more than a couple of seconds. For example, one investor wrote to me upset that he had a stop loss on a share at 420p. It spiked down to that price for literally 30 seconds, and there weren't even any trades at that price. But his broker closed him out at a loss immediately.
Many upset investors seem to single out spread betting firms for getting closed out. So what's the answer? My view is: stop losses are a great idea but as long as you have access to a screen for most of the day, it's better to control them yourself. If there is a sudden and unwarranted slide down to your stop loss, you can decide to hold rather than to be sold out automatically.
One example from me: I had a position in Brixton with a stop loss at 440p. The share retreated to 438p after a couple of broker downgrades. In my experience, shares hit by downgrades often rise again after the broker's clients have finished selling. In this instance, if I'd had an automatic stop loss I would've lost my money. However, as I write this, the share is back over 440p and heading up again.
Of course, it is up to the individual investor to decide. Some argue it is worth having guaranteed stop losses in case of an unexpected terrorist event or a sudden market crash. However, these days the market takes terrorism in its stride as on the day of the London bombs - prices were only affected for a short time and those with stop losses would have been stopped out!
On balance, my view is: have stop losses by all means, but investors should make the ultimate sell decision.
The market has been very volatile but, despite that, still seems strong. My position has been to carry on holding my stocks which, so far, has proved the right move. Good risers for me recently include overlooked companies such as Fenner, Mouchel Parkman and CSR, the chip company which continues to rise well.