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Make the most of market orders and price alerts

Automatic trading instructions can be helpful when used with care
January 7, 2021
  • Market orders should be used with caution
  • Price alerts can be a better option

Looking after your investment portfolio can be extremely time-consuming. Generally the more research you do the better before you decide to buy a company, and then you need to monitor performance to satisfy yourself that the investment case hasn’t changed.  

For most investors, this will not be their full-time job. Having a disciplined process for how and when you review your portfolio and trade stocks should help save time, and lead to better decisions. This is where platform tools can come in useful. 

Most investment platforms will let you set up trading instructions, so you can buy or sell a stock if it hits a certain price. Perhaps more useful, they also let you set up watchlists and receive alerts on specified price movements, to save you missing any notable events. 

 

Automatic trading instructions

A limit order is an instruction to buy or sell a share at a specific price or better. A ‘buy’ limit can only be executed at the limit price or lower, and a ‘sell’ limit can only be executed at the limit price or higher. This can be useful for value-focused investors, if they have worked out what price they are willing to pay for a particular company, or at what price the stock is overpriced and should be sold. 

Similarly, a stop order is an order to buy or sell a stock once the price reaches a specified level, but the price direction is the other way around. A stop loss order triggers you to sell a company once it drops below a certain price. Investors generally use a sell stop order (also known as a stop loss) to limit a loss or protect a profit on a stock they own. 

Selling fallen stocks can be psychologically difficult because it involves crystallising a loss and admitting that you were wrong. But Lee Freeman Shor, author of The Art of Execution, identifies holding on to poor performing stocks for too long as one of the most common mistakes that hinders successful investing. 

Buy stop orders are less common, used when a stock exceeds a specified price, but can be used to limit a loss or protect a profit on a stock that has been sold short. If you follow technical or momentum trading principles, you might be interested in buying a stock once it passes a specified price. 

Use of market orders on mainstream platforms is still the preserve of the few, although it has been growing. Hargreaves Lansdown, which has over 1.4 million customers, says that around 98 per cent of share trades on the platform were placed without automated instruction in 2020, a slight increase on previous years. 

Interactive investor, however, has seen more activity with almost a quarter of customers who traded in 2020 using an automated instruction over the course of the year. The platform says in the six months before lockdown 15 per cent of trading customers used limit or stop orders, then in the subsequent seven months this rose to 24 per cent. 

Myron Jobson, personal finance campaigner at interactive investor, says: “While it is difficult for everyday investors to completely extract emotion out of investing, limit orders help to mitigate the urge that stops investors from sticking to their plan. They allow investors to set limits on the maximum amount they are willing to win or lose as well as the price at which they’d like to buy a particular investment.”

 

To be used with care

While automatic trading instructions can help you maintain discipline, they can have significant drawbacks. For example, investors with a stop loss order at, perhaps, a price 20 per cent lower than what they paid could have ended up selling a significant proportion of their portfolio at very low prices during the sell off in the first quarter, and missed out on returns as prices rose. 

Time out of the market can be very expensive, particularly in volatile conditions. A stop loss order could leave you selling at just the wrong time, because of market sentiment rather than company fundamentals. A recent study by Fidelity showed that $10,000 (£7,343.32) invested in the S&P 500 on 1 January 1980 would be worth $697,000 by 31 March 2020. If you take out the market’s five best trading days - the increase falls by 38 per cent to $432,000.  

On most platforms, once triggered, a stop loss becomes a market order. This means that by the time the trade has executed, it can be back, sometimes significantly, above your stop loss price. This is particularly significant for volatile stocks, perhaps listed on the Aim, which can leave you stopped out when you don’t expect it. 

To use automatic trading you must also be comfortable with platforms’ own limitations. Share prices can change in seconds and if there is a delay between your price trigger point being reached and the platform placing your deal, it may not be executed at the price you have set, or at all.

Hargreaves Lansdown, for example, will continue to place stop sell order if the bid price is lower than your order price when they place your deal. Its website states “In some cases a share price that is falling could ‘gap’, for example moving straight from £1.20 to £0.90; if a stop price was set at £1.19 the shares would still be sold at £0.90.”

Well-known private investor Peter Higgins says he uses market orders only very sparingly, and notes that investors should consider a company’s sector and market cap when working out an appropriate order price. Investors in small cap or technology companies can expect more volatility than those in other areas of the market. 

 

Price and news alerts

A better strategy may be to set up alerts. This means you will be notified when a stock reaches a certain price, so you can review it and decide if you want to trade. Hargreaves Lansdown has a share alert service which you can use for 50 different stocks – regardless of whether or not you own them. 

The alerts last for 90 days, and are triggered when the share rises or falls to the level you set. You can also be notified when a stock goes ex-dividend or a company issues a regulatory news service (RNS) announcement.

AJ Bell lets you set similar alerts but with no expiry on up to 20 stocks, and notifies you of corporate action announcements through its secure messaging system. Interactive investor, meanwhile, lets you set up to 10 alerts, which must be set on its website rather than its app. You can choose to have the alerts sent to you either by SMS or email. 

While Freetrade lets you create a watchlist, it does not currently have an alert service. But a spokesperson said they are working on this functionality which should be available “very soon”.