Investology

It’s not rocket science, only a balance between greed and fear, but ultimate success goes to those who can afford to be patient.

By Emckoba; Snr. Investment Analyst

March 25, 2000

 

See part I for question and answers 1 through 5

See part II for question and answers 1 through 5

 

Question 19

How does a "stop loss" work in practice? Can you give us an example so I can understand it properly?

 

Answer 19

I will use a recent stop loss transaction I completed to illustrate this point. On Friday March 24, 2000, I purchased Equess Communications (EQS/Cdnx) for $0.50 per share and thereafter it started to move up briskly in price. Since I knew I would not have time to track it later on in the day, (Bid/Ask was $0.74/$0.79) and I also wanted to protect my gains I put in a stop loss as follows, using my TD Waterhouse account :-

 

Action : Sell No. of shares : 10,000

Price : $0.70

Date : March 24, 2000

 

Special Instructions

Stop Order (Checked off this) Stop Limit $0.65

 

The significance of the above transaction was that if and whenever an order was filled at $0.70 on March 24, my order became a market order, to be sold off to the highest bidder at that point i.e. $0.70 or below. The stop limit of $0.65 means the transaction should not be completed below $0.65.

Luckily, the order was filled at $0.70, making $0.20 a share . EQS closed at $0.64 for the day and hence I successfully protected part of my gains. The importance of this transaction was that the stock would only be sold when the market was collapsing. If the market continued its upward move, the stock would not be sold; in that case you have to move up your stop limit price daily to increase that portion of your gains you want to protect.

 

TD does not allow stop limit transactions on Pink Sheets and OTC BB securities. I am not sure whether other Canadian discount brokers have the same policy.

 

Question 20

Mitel is trading around $40. Is it still a good buy?

Answer 20

It amazes me when people start asking these questions when a stock has moved up substantially. For a long time Mitel remained around $10, even after they had completed the Plessey acquisition. The trick is always to buy stocks when they are out of fashion e.g. Forbes Medi-Tech ($13) or Cryptologic ($51), HealthAxis.com Inc ($18) or Deltathree ($18) and patiently wait for your time; take your 100% or so gain and wait for the next opportunity.