Twitter (TWTR: $23.40) has had a strong run these past two weeks. There are rumors swirling around about various firms buying the company and as we said in the newsletter Monday, there are many scenarios that could take place to cause the stock to move dramatically in either direction.
If more suitors join the fray, the stock could shoot higher. If they all drop, out the stock could reverse course and drop down to $18 or lower.
So we thought you may wish to consider a GTC* stop order if you still have the stock. A stop order as you may know already, will execute if a certain price is reached. You can have a buy stop or a sell stop. A buy stop is used if you want to acquire more shares if the stock goes higher. You would use this so that you don’t miss out on a stock if it goes higher as you expect it to do. A sell stop (which used to be called a stop loss) is used to get out of a stock if it goes lower.
*GTC – Good ‘Til Cancelled
With Twitter at around $23, you can place an order below this price that will execute when that price is reached, say $22, or $21. Thus, if the stock goes to $22 your stop becomes a market order and you are generally executed at your price. If the stock is headed to $18 or lower, this will get you out without giving back all the gains you made in the past few weeks. We think this is such a good idea, we are going to place an imaginary stop (since we don't own any of our stocks) at $22.45, thus protecting our gains.
One caveat – stops work about 99.9% of the time. Where they don’t work is when the stock is halted and the stock reopens at a price below your price. For example, if you have a stop at $22 and the stock opens at $19, that’s where your order will be executed. Not pretty. Why would that happen? Well, if there was some bad news that came out overnight causing investors to rush to the exits, this could cause the stock to plummet. But again, this is rare.
Good luck with your Twitter. And good investing overall.