Stop Losses on Shares

lr1277

Hi

I am hoping to get your advice on the following.

I normally don't take account of dividends, but recently I bought a share that is paying approximately a 4% dividend (based on today's closing price). It is going ex-div on Friday.

Now, I set stop loss limit orders at approximately 10% below my buying price.

My question is, should I reduce the stop loss by the dividend amount from Friday onwards?

I am aware that share prices tend to fall by the dividend amount on the day the share goes ex-div.
So on Friday, I suspect the share is going to drop in price by the dividend amount.

Would you keep the stop loss at the original figure (i.e. 10% below buying price) or would you drop the stop loss on the basis you have made that amount from your share?

Many thanks in advance.

IntelligentInvestor95

I would increase the stop loss in general. While I understand 10% is reasonable, I have found that some of my best performing investments at one point were 15 or 20% below what I bought it for. That's just my personal opinion!

bowlhead99

Lower the stop loss.

You are saying you bought a share for £100 a share and they have now intentionally reduced the value of the company to £96 a share by giving the shareholders £4 into their respective pockets.

So you are sitting there with a company share worth £96 and have arbitrarily decided that if that company price has a mild fluctuation and is at £90 next week (a drop of only about 6%) you want your broker to sell your holdings and charge you a trading commission because it is no longer a good company that you'd like to own?

That sounds like b0llocks to me, and getting stopped out of perfectly decent shares at a loss due to perfectly normal market fluctuations is an easy way to lose a lot of money.

I agree with the other poster that 10% is also too tight. But if you want to have an investment methodology which locks in losses for you every time a perfectly decent share has a mild blip, I'm not complaining, because your action of selling good shares at cheap prices makes them available in the market for the rest of us.

lr1277

Thanks for the advice. I take your point about lowering the stop loss, but I will admit to being a nervous investor. As this is my only pot of money and won't be putting any new money in, any loss is consequential.

I think this means for me I need to learn to brace myself.

cloud_dog

Just as a comment.... Where I purchase shares purely for their dividend income I rarely (probably never) have a stop/loss implemented.

I will monitor them but it will be more around their earnings and dividend cover.

Would agree with the consensus to lower your S/L but you need to think if you bought this share as an income generator or is the divi just an incidental and you are looking for capital appreciation.

EDIT: An example for me is RDSB, held them for many years, have never sold any, in fact I've added more when they fell below £15 a little while ago. Having said that...their ability to continue to pay their divi is in a precarious position and I am paying far closer attention to the shares at present.

Biggles

To begin with, the ex-div date is tomorrow; Friday is the record date and any price fall will be at Thursday's open.

10% is a bit tight, though I do use it sometimes for shares that I'm ready to move on from but want to give the 'benefit of the doubt', ie they either rise or go. But then I use a trailing stop loss, ie if the share reaches a new high, I raise the stop accordingly.

But I assume you're aware that, when you set a stop loss, most (all?) brokers will use the bid price to trigger the sale, not the mid price?

That is, if you bought a share at 100p, you might set the stop loss at 90p. However, when the mid price of the share reaches 92p, the spread will probably already be 90-94p and so it will be sold. What I'm saying is that, when setting the stop loss price, you need to deduct 10% from your start price and then deduct the spread, the amount of which will vary from one share to another.

eskbanker

lr1277 wrote: »

Thanks for the advice. I take your point about lowering the stop loss, but I will admit to being a nervous investor. As this is my only pot of money and won't be putting any new money in, any loss is consequential.

I think this means for me I need to learn to brace myself.

When you say it's your only pot of money, are you meaning that you don't have any savings for a rainy day, or that this is your only investment pot beyond savings?

If the former, you're exposing yourself to a ridiculous amount of risk, or if the latter then it's still extremely rash to make your only investment a single share rather than following accepted wisdom of diversifying to avoid exactly the scenario you paint....

Malthusian

If you are a nervous investor then why are you investing in individual shares that could suffer very dramatic falls in value for prolonged periods, or in the worst case lose 100% of your money?

A stop loss is only partial protection. The company could announce tomorrow that the CEO has run off with the company's money, the accounts are all fraudulent, and the shares are suspended immediately, pending liquidation with 100% losses to shareholders. As there is no-one in the interim who wants to buy your shares at 90% of your purchase price your stop loss is a chocolate fireguard. Unlikely (especially if it's a blue chip) but not impossible and not unknown.

If your stop loss is triggered then what are you going to invest your 90% of original capital (minus transaction costs) in? Another share that you think might do well? With another 10% stop loss? This is an excellent way to lose money very quickly.

thegrind

When you set a stop loss your basically setting a target above your head for the market to take you out as certain parties can see stop losses set. This usually happens when your singing your heart out in the shower at 8am.

Games are played everyday on the markets, don't be a victim.

Do your research and ask yourself why your buying in. If your that nervous think twice about doing it or at least stick your money in the more qualified hands of an IFA.

Glen_Clark

A long time ago when I used to read brokers newsheets I seem to remember they were full of ideas like stop losses and market timing. By a remarkable coincidence all of these ideas increase trading and commissions for them

AnotherJoe

lr1277 wrote: »

Thanks for the advice. I take your point about lowering the stop loss, but I will admit to being a nervous investor. As this is my only pot of money and won't be putting any new money in, any loss is consequential.

I think this means for me I need to learn to brace myself.

If you are a nervous investor, I suggest that investing in single company shares is a poor idea.