I am starting to get quite a few emails from new investors who want my opinion on various topics, so I thought I would cover a few ‘beginner pieces’ over the coming weeks, hopefully putting together a few blog posts which stock noobs can find accessible.
One of the things I have started to finally perfect in my 10th year in the stock market is just checking into my portfolio 1-2 times a day. This is still too much in my opinion but this is way down from the 15-20 times a day I used to check during the early years. Why is this so important? A key part of being a successful Investor or trader is having discipline, the more times you check in on your portfolio the higher the chance there is of trading on impulse rather than trading on clear rationale. I share four handy ways that can reduce the time you spend in front of your share portfolio and hopefully lead you to make better trades as well as saving time…
There are numerous price alert services which will email/text/push you when a certain Buy or Sell price is reached. If you have done both your fundamental and technical research then you should have very clear price targets in mind. This is where the risk/reward favours a buy or where the stock becomes overvalued and you may want to consider selling, or at least derisking.
By far the best price alert service I have seen is through the IG Index Stockbroking account, a screenshot of which is below:
The service allows unlimited price alerts on any stock (you don’t need to own the stock already), which can be set for BUY and/or SELL prices. Each time a target is met IG will alert you within the trading platform, but perhaps more useful an email notification and/or a push to your Phone or iPad.
I prefer price alerts as I tend to trade manually as sometimes some further rational thought is required before placing the trade, but you can also automate this step too…
2. Stop Losses
I will assume that you are an inexperienced investor and therefore using a typical execution only Retail broker, i.e. one who places orders through a specialist Retail Service Provider (RSP) Market Maker. Most retail brokers allow you to place Stop losses which can help you to manage your risk and deal automatically on your behalf. I won’t get into how to use stop losses as part of a risk management strategy in this piece, I will aim to cover this in another post. A stop-loss though is where a number of shares defined by you is instructed to be sold at a price defined by you. The price you set though will not necessarily be the price the stop-loss is executed – more on that later. Here is what a typical stop loss order screen will look like, using Hargreaves Lansdown as an example:
As touched upon above, a stop-loss is not a guaranteed to achieve the sell price you have determined or even be executed at all. This can happen for a number of reasons, but here are the three most common:
- During periods of volatility the market may move quicker than the market maker can accept your order. This could also be where the price quoted by the market makers is not the real price and trades are being negotiated manually.
- Even under less volatile periods a stop loss can fail to execute at your desired price if there are limited buy orders available at the level you wish to sell. This is realistically only likely in the smaller stocks, normally where you are dealing in larger sizes but sometimes even smaller sizes (c£1000) can be an issue in very illiquid stocks. Pay attention to the Exchange Market Size which can be found on the London Stock Exchange site, example here. The EMS is the number of shares a market maker under normal conditions is obliged to deal in. If your stop orders are for a number of shares higher than this, then there is a chance the stop loss may fail or not achieve your stop price.
- When news is released, the market may ‘gap up’ or ‘gap down’ as orders are placed in the market on SETS. On stocks where market makers are present, i.e typically smaller stocks which use the SEAQ platform, these market makers may set their buy price at a level significantly below your stop loss.
The end result, the stop loss may be triggered at a level materially below your stop loss. You should think of a stop loss as an instruction to stop, not a guaranteed stop. This is why I rarely use stop losses or Limit orders as I like to take some time to understand the price action before executing. I therefore tend to use price alerts, but stop losses can be useful to limit risk where you are unable to get online for extended periods.
Some brokers, such as Barclays StockBrockers also offer trailing stop losses, which are very useful if you want to lock in profits, as the price moves up the stop loss position also moves up. For example:
You buy a stock at 100p with a trailing 10% stop loss, i.e at 90p. The price increases to 150p and your stop therefore increases to 135p. The share price then falls to to 134p and the the stop is triggered at 135p.
Note – all of the same issues as above are still valid with trailing stop losses, but one way to avoid some of them is to place orders directly at the exchange, using Direct Market Access (DMA) and skipping out the middle man, i.e. the market maker. I will cover this in detail in a further piece but this allows orders to be filled with more precision, but is too advanced for this post.
3. Limit Orders
Limit orders work in a very similar fashion to stop losses and there are two types of Limit orders, BUY and SELL orders. A BUY limit is where a Buy order is triggered when a price falls to a level as determined by you. A SELL limit is an order to sell a stock once the sell price reaches a certain limit.
Most retail brokers will not execute if the limit order price moves against you between the instruction triggering and a quote being received from the RSP:
Say a BUY order is placed to purchase a stock at 200p. The share price falls from 210p to 200p and the order is placed, however there is a wave of other BUY orders from other market participants at this level, which means very little stock is available to BUY at 200p and the Buy price moves to 201p before your order can be executed. The BUY order is not executed and returns to pending.
This buy order will not be dealt and with most brokers will return to pending. Do check with your individual broker though how they deal with Limit orders.
4. RNS Alerts and other Market News
Regulatory News Service (RNS) is the platform where all UK companies must release price sensitive news. Clearly macro news and other newspaper rumours can also impact the share price also, the most convenient and free way to receive this information instantly is via Vox Markets. You will receive notification pushed to your phone or desktop as soon as a company you follow releases information or is covered in any of the major newspapers. This free service should help you avoid continual checking of news feeds and just sit back and wait for a notification. There are also similar services, such a Investigate which will email you on the release of a company RNS.
Placing some reliance on the above tools should reduce the time spent staring at your portfolio. My suggestion is to use the time instead to do so research on your portfolio or on some of those companies on your watchlist. Or even dare I say it go out and get some fresh air!