A:

To answer this question, let's look at a few different situations. You bought a stock for $10 but want to be able to protect against loss, so you decide you want to enter a sell order if the price reaches $9.50. However, deep down you believe the stock is going up and you want to lock in profits at $11, so you want to enter a second sell order at $11. The problem is, you can't use this strategy.

First thing's first: the order you should be trying to enter for the $9.50 price (to reduce the downside) is a stop order not a limit (or sell) order. This is important because if you enter the order as a limit order for $9.50, it will be sent to the exchange and be filled immediately at the best available price, which should be around $10. This doesn't accomplish the collar strategy you are trying to create.

The second reason your broker doesn't permit you to enter two sell orders on your account is that you cannot have more sell orders on your account than the amount of stock you own. This is to protect you. If the stock you're referring to is very volatile and it hits $11 and then subsequently drops past $9.50 on the same day, you've then effectively short sold the position without properly documenting it as a short sale.

You can't cancel one of the orders after the other has been filled. Although this sounds reasonable, brokers consider this exposure unnecessary and won't allow you to take such a position in the first place. Also, because most of these restricted orders are handled manually by traders, they do not have the time to watch the price of a single stock in order to decide which order is correct and still fill it. There is then no way for them to prevent the unnecessary exposure to risk.

One alternative that some brokerages have provided to increase order flexibility are customizable computer trading platforms. This is software distributed by some active trading discount brokerages to their clients, which allows the clients to enter different orders according to their investing strategies. The loss-prevention/profit-taking is one type of order that can be entered using this platform. The drawback is that the order is only effective while you are connected to the Internet and your computer is running. That is, the software is what monitors the market and will send the appropriate order when necessary; no order is sent to market until proper triggers are met. If there is anything wrong with your computer, then your order won't be executed.

To learn more about online brokerages, see 10 Things To Consider Before Selecting An Online Broker and Start Investing With Only $1,000.

RELATED FAQS
  1. How do I place an order to buy or sell shares?

    Read a brief overview of how to open a brokerage account, how to buy and sell stock, and the different kinds of trade orders ... Read Answer >>
  2. I want to buy a stock at $30, sell when it reaches $35, don't want to hang on to ...

    Once you've identified a security that you want to purchase, you need to determine a price at which you want to sell if the ... Read Answer >>
  3. What's the difference between a stop and a limit order?

    Different types of orders allow you to be more specific about how you'd like your broker to fulfill your trades. When you ... Read Answer >>
  4. How do I place a limit order online?

    Learn how a limit order is placed, the types of stocks it is most useful for and the specifications placed with it to suit ... Read Answer >>
  5. What is the difference between a stop and a market order?

    Learn about market orders and stop orders, how they are used and executed, and the main difference between stop orders and ... Read Answer >>
  6. What's the difference between a market order and a limit order?

    Buy and sell trades with market orders at the present stock price and execute limit orders if the stock price falls within ... Read Answer >>
Related Articles
  1. Trading

    The Basics Of Trading A Stock

    Taking control of your portfolio means knowing what orders to use when buying or selling stocks.
  2. Trading

    How To Place Orders With A Forex Broker

    Learn how to set each type of stop and limit when trading currencies.
  3. Investing

    Making The Trade: Understand Order Types

    Buying and selling stock can be a lot like buying or selling a car. Traders should use and understand tools such as market orders, limit orders, day orders, and good-'til-canceled orders to ensure ...
  4. Trading

    Understanding Order Execution

    Find out the various ways in which a broker can fill an order, which can affect costs.
  5. Trading

    The Stop-Loss Order - Make Sure You Use It

    It's a simple but powerful tool to help you implement your stock-investment strategy. Find out how.
  6. Investing

    Explaining Market Orders

    A market order is the most common order used to purchase a financial security.
  7. Trading

    Which Order To Use? Stop-Loss Or Stop-Limit Orders

    Stop-loss and stop-limit orders can provide different types of protection for investors seeking to lock in profits or limit losses. Investors need to know how each type of order works to know ...
  8. Investing

    Narrow Your Range With Stop-Limit Orders

    With stop-limit orders, buyers protect themselves from prices too high for their tastes.
RELATED TERMS
  1. Bracketed Buy Order

    A buy order that is accompanied by a sell limit order above the ...
  2. Bracketed Sell Order

    A sell order on a short sale that is accompanied (or "bracketed") ...
  3. Immediate Or Cancel Order - IOC

    An order to buy or sell a security that if not immediately filled, ...
  4. Limit Order

    An order placed with a brokerage to buy or sell a set number ...
  5. Order

    An investor's instructions to a broker or brokerage firm to purchase ...
  6. Market-With-Protection Order

    A type of market order that is canceled and re-submitted as a ...
Hot Definitions
  1. IRS Publication 970

    A document published by the Internal Revenue Service (IRS) that provides information on tax benefits available to students ...
  2. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  4. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  5. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  6. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
Trading Center