The best and most underused tool for individual investors

The stop-loss. The equalizer for individuals to compete with those lightening quick super-computers a large, international brokerage firms.

In a nutshell, stop-loss trading is a sell side decision that allows the investor to dictate at what price a company's share should be sold. Once the share price hits that number, the system triggers an automatic sell of those shares.

The major benefit of putting a stop-loss on all shares is to curbs potential losses, or maintain present gains. For example: you buy a stock at $25.00 per share. If the share price dips, you create a stop-loss at $22.50 to keep your losses to a minimum (while also giving the stock a chance to return to the initial price). When the stock hits $22.50, the system immediately sells the number of shares that you indicated in your stop-loss for that holding. On the positive side, if a share jumps to $30.00 and you want to preserve your present earnings,  use a stop-loss at $28.00 per share.  This will ensure that you will get out ahead regardless of the share price's fluctuations.

Investors that use the stop loss effectively will use a stop-loss on every trade and continue to adjust it based on how a company's share is faring. If the aforementioned stock jumps to $35.00 per share, you would adjust your stop-loss from $28.00 to $32.00. The adjustment will guarantee that you will maintain your earnings of $7.00 per share from the original price of $25.00, and not allow you to only earn $3.00 ($28-$25) from your first stop-loss order.

Like everything, there is a disadvantage to stop-losses in your portfolios. The automatic trigger that is set off to sell your shares of company does not take into account market volatility.  Meaning, if you set a stop-loss at $22.50, it is very unlikely that the preferred price will be the same as the market price (you may sell at $22.00).

A lot of investors, investment advisors, and stockbrokers refuse to take advantage of stop-loss orders due to pride on the loss of initial clients' investments. If they had, the losses on the majority of their clients' portfolios could have been minimized amid the financial crises. In our investment consulting sessions, we will always ask and recommend that each client put a stop loss on all of their equity accounts.