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. 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 >>
  4. What's the difference between a market order and a limit order?

    Market orders execute a transaction at the present stock price and limit orders execute the transaction if the stock price ... Read Answer >>
  5. What is the difference between a stop order and a stop limit order?

    Learn the differences between a stop order and a stop limit order. Traders use these as stop losses and regular investors ... Read Answer >>
Related Articles
  1. Investing

    The Basics of Trading a Stock: Know Your Orders

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

    Understanding Order Execution

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

    Explaining Market Orders

    A market order is the most common order used to purchase a financial security.
RELATED TERMS
  1. Bracketed Buy Order

    A buy order that is accompanied by a sell limit order above the ...
  2. Immediate Or Cancel Order - IOC

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

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

    A type of market order that is canceled and re-submitted as a ...
  5. Scale Order

    A type of order that comprises several limit orders at incrementally ...
  6. Canceled Order

    1. A previously submitted order to purchase or sell a security ...
Hot Definitions
  1. Stagflation

    A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, ...
  2. Notional Value

    The total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets ...
  3. Interest Expense

    The cost incurred by an entity for borrowed funds. Interest expense is a non-operating expense shown on the income statement. ...
  4. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  5. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  6. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
Trading Center