Guest Author - Guido Deboeck

Suppose you are holding shares of stocks that already have climbed 10%, 20% or more. How do you protect your gains? The last thing you like to see is your preciously earned gains evaporate under the sun or disappear as a result of a major market swing. You also want to protect against a sudden drop in the market price of your stop. What kinds of protection can you use? This article is about various sell orders you can deploy to protect your portfolio holdings.

The basic sell order types available are market, limit, stop market, stop limit, and trailing stop orders.

What is a market order? A market sell order is in a way like a panic button to be used only in emergency situations. A market sell order is for an immediate sale of a number of shares at or near the current market price without any other restrictions. Once your order is received in the market your sell order will seek execution. The speed and price your order will be executed at will be affected by many factors, including market volatility, size and type of order, and available market centers. Prices can change quickly in fast market conditions, resulting in an execution price that are different from the quote displayed at the time you entered the order.

What is a limit order? A limit sell order indicates the lowest price you are willing to accept to sell a security. Your order will be executed at your designated price or better. This helps protect your order from sudden volatility, but it also means you will only sell the security if it reaches the price you're seeking. Unless you specify how the limit order should be processed ("All or None," "Do Not Reduce," or "Fill or Kill")], it may be partially filled with fewer shares sold than you requested if the price you specified is met but the full quantity isn't available at that price. A limit order also allows you to specify a time period within which your order remains active-it will seek to completely fill your order at your limit price until the time period ends, after which your order will expire. Trades executed in multiple lots on the same day are charged a single commission but trades partially executed over multiple trading days are subject to commission charges for each trading day.

What is a Stop market order? A stop market order indicates you want your stop order to become a market order once a specific price has been reached. There is no guarantee that the execution price will be equal to or near the activation price. Stop orders are accepted on listed stocks, as well as most options. When choosing Stop market, sellers must enter a stop price below the current bid price. When placing a stop order, keep in mind that activation prices differ for each exchange. Stop orders placed for NYSE securities are activated by the last traded price. Sell stop orders for NASDAQ securities are activated by the bid price and buy stop orders by the ask price.

What is a Stop limit order? A stop limit order indicates you want your order to seek an execution at a specific limit price or better once the activation price is reached. You should enter an activation price as well as a limit price for these orders. Depending on your strategy, the limit price and activation price may be the same. The order becomes a limit order once the activation price has been reached. Stop limit orders are accepted on stocks, as well as most options. When choosing Stop limit, sellers must enter a stop price below the current bid price. When placing a stop order, keep in mind that activation prices differ for each exchange. Stop orders placed for NYSE securities are activated by the last traded price. Sell stop orders for NASDAQ securities are activated by the bid price.

What is a Trailing stop order? Trailing stops are orders entered with a stop parameter that creates a moving or "trailing" activation price. When using a trailing stop, you must enter the stop parameter in points or as a percentage. If you use points, the trail amount must be a minimum of one cent ($.01) and no greater than the current bid (if a sell) or ask (if a buy). If you use a percentage, the trail amount must be a whole number between 1 and 99.

When placing a stop order, keep in mind that activation prices differ for each exchange. Stop orders placed for NYSE securities are activated by the last traded price. Sell stop orders for NASDAQ securities are activated by the bid price.

As with any stop order, there is no guarantee that the execution price of your order will be at or near the activation price. Execution at a price different than the activation price is more likely to occur in conditions such as a fast-moving market, at market open or market close, or when trading has been halted on a security. A limit order carries the risk of missing the market altogether because it may never reach or surpass the specified limit price. In a fast-moving market, it might be impossible to execute an order at the limit price, so you may not have the protection you sought.