If you invest in the stock market in any way, you have had to place a trade. And doing so can be a lot of work, especially if you spend time researching your picks.
Even after you place a trade, though, your work is never fully done. It sounds cliche, but it's true. Once you have completed a transaction – whether stocks, bonds, mutual funds, or options, you need to take these important steps to make sure that you are prepared going forward. They are simple, but if you forget to do them and need to go back, it can be very difficult and time consuming.
1. Print Your Trade Confirmation
After you've hit “confirm” and you're trade has gone through, many people don't go back and get their trade confirmation. However, this important document shows you the actual price your order was filled at, and as a result, gives you your cost basis for the trade.
Yes, the cost basis rules are changing, but you still need to keep track of what your cost for the transaction is. This becomes essential when figuring out your own profit or loss, and it is very helpful at tax time.
2. Enter Your Trade Into Your Favorite Portfolio Tracking Method
After your trade, and once you get your trade confirmation, you should enter the data into your favorite portfolio tracking method. By doing it right away, you can see how your investment is performing sooner. I personally like Quicken, but you can use any method of your choosing.
In fact, last year I surveyed the readers of The College Investor, and you can read their answers at: How You Keep Track of Your Portfolio.
3. Setup a Stop Loss Order
One of the biggest reasons people are afraid to invest is because they are afraid to lose money. And this can become a paranoia after a trade is placed. As such, you should think about what is the most you are willing to lose on a single trade, and put in a standing stop loss order to protect yourself.
If the amount you are willing to lose is 5%, then put in a stop loss for 5% below your cost basis. This will save you should the price drop and you are not able to get to a computer to execute a trade.
4. Relax
Once all the work is said and done, it is time to relax and enjoy your investment. While it's not like sitting on the beach in Mexico, it should be enjoyable to know your money is going to grow over time. So, relax, don't think about it, and let the market and the power of compounding do it's job.
5. Monitor Your Position Monthly
Finally, make sure that you aren't overly checking your positions. The market will go up and down everyday – that's just a fact of life. You can drive yourself crazy if you try to check on your positions all the time. Instead, make a routine of just checking your positions at the end of each month. If anything drastic does happen, your stop loss order (see step 3) will protect you.
Readers, can you think of anything I'm missing that you should do after a trade? Do you follow any of these steps right now?
I like the stop loss order. I never do it, not sure why.
I have yet to start to keep an organized sheet for all my trades, that’s why I feel all over the place with them.
I don’t think a lot of people utilize stop loss orders, but they are so useful. I think they forget about them, and that’s the problem. Think about using software such as Quicken or Mint to help get organized.
The stop loss is the most important of a trade. Before opening a trade, you must decide where you put your stop loss.
Is there a fee for stop loss orders?
Not until the order is executed – and then it is usually just your normal trade commission. You can specify a stop loss order to be “Good til Cancelled”, which means it remains in effect until you cancel it. Pretty useful.
Stop Loss Orders are a poor investment concept. If you do proper research and have bought a quality stock at a good valuation; why would you sell it when it gets cheaper? Investors need to take a small enough position to buy MORE if the stock becomes a better value.
That is a great point Ken. If you are buying a stock, bond, or mutual fund for long term fundamentals, I would not use a stop loss order, and instead buy more. However, for all options trades, and speculative stock trades, I think a stop loss order is a good idea.