Protect capital with stop-loss order
This does not always work out. Especially in times when the stock market is virtually going crazy.
A stop loss order is an old stock market tool that allows you to hedge your stock investment against falling prices. In practice, the stop-loss order works very similarly to a normal sell order. The only difference is that with the stop-loss variant, a price threshold is set from the beginning, below which the share is immediately thrown onto the market. The share is thus sold and the investment is protected against falling prices, even if the shareholder can not constantly look after his portfolio or. just then. Without the ability to place a stop loss order, the shareholder would lose a lot of money if they could not take immediate action and place a sell order when prices were falling.
Danger with volatile stock market
Yesterday was such a day. Share prices fell worldwide after the weak stock markets in Asia, in some cases with dramatic price drops. The Frankfurt stock exchange was also affected. At times the minus was almost 8 percent. The stock index Dax fell to a daily low of 9.338 points.
Fortunately, many stock owners had hedged their portfolios with stop-loss orders. These were triggered yesterday in rows. However, this further fueled the selling pressure, which led to further price declines and in turn undercut other stop-loss limits. This probably explains the sudden high price drop yesterday.
The dangerous price drop
In theory, the stop-loss orders worked, and in practice, the orders did exactly what they were supposed to do yesterday. You put the shares up for sale. In a more or less straight stock market, this also makes sense.
Yesterday, however, there were sharp price swings on the stock exchanges. First downwards, but then just as quickly upwards again. At 3:30 p.m., the Dax was at 9.523 points. Only 4 minutes later it went down to the already mentioned 9.338 points. That is a price drop of a whopping 200 points. Something like this can only be observed very rarely on the Frankfurt Stock Exchange. Many stop-loss orders had already taken effect and sold the deposited shares at the next available price.
However, the achieved selling price can be far below the stop loss mark depending on the market situation. Recently, an investor who speculated on the Swiss Franc with CFDs had to learn the same thing.
But now the unexpected happened. Another 7 minutes later, the Dax was already back above 9.500 points. A stock market elevator down and back in only 11 minutes. In the process, numerous investors were shaken out of their investments and are now left without shares. Your portfolio has become very empty.
Chart analysis © Eisenhans – Fotolia.com
Private investors underperform
So just betting on stop loss was not enough yesterday on the stock market. The investors would have had to intervene manually directly. But who can always do that purely in terms of time when it matters, and then also has the nerve to make the right decision within 11 minutes.
Private investors are likely to be regularly overwhelmed in this regard. In such a case, an actively managed equity fund is clearly a better choice.