The business of investing in stocks is an inventory buying & selling business. Naturally, the companies that sell stock to the public want you to buy and hold it forever in order to maintain its value. But if you are buying without any selling, you are literally driving without any brakes. That is a horrifyingly unsafe position for your principal. The most effective defensive brake system for your money is a stop-loss order on your stocks.
A stop-loss order is an order you give your broker to sell your shares if a stock falls below a certain price. You can select a stop-loss price for your stock based upon chart patterns or a percentage drop from your purchase price. And some brokers automatically move them as a stock moves up in price to lock-in profits for you.
The first time I learned this lesson (not the last unfortunately), I was just 18 years old. One of my early stock purchases, recommended by a stockbroker from a famous brokerage firm, was stock in a famous airline just before it trailed off into bankruptcy. Had I read this article before the airlines financial calamity, I would have rescued most of my $5,000 and prevented my own financial...
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