Revolut's Latest and Most Important Investing Feature
Managing risk through stop-loss orders
A question that any investor always asks of any investment is what is the risk? What is the risk of investing in a startup company? What is the risk of investing in real estate? What is the risk of investing in cryptocurrency? In this post, let’s explore how investors understand and calculate risk and how this relates to Revolut’s latest feature.
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Investing in a startup
When an investor qualifies a startup investment, there are three criterion to consider — reviewing two literary pieces and making an instinctive judgment. The first literary piece is the business plan. The business plan allows an investor to understand the direction of the startup and how the team will operate in order to achieve their milestones. An investor interprets this business plan according to their perceived knowledge and experience, and grades the hypothesis of the startup and their ability to meet their milestones.
The second literary piece is the balance sheet. The balance sheet showcases current income and expenses relative to future income and expenses. Even though this literary piece only shows numbers, it also tells a story. This story communicates the startup’s understanding of how their business fits into the economy and the market opportunity. Again, the investor will weigh the startup’s “story” versus their own understanding of the economy and market opportunity.
The last criteria an investor considers in a startup is making a judgment call on the Founder and other key team members. Does the Founder have the ability to execute successfully against the plan? Does the team have the competency to adapt to challenges? Is there an “it” factor possessed by the Founder or team that is indescribable, yet the difference-maker?
After consideration of all three criterion, an investor calculates risk, specifically, the financial risk. The financial risk is not always the sum of the investment amount — a $100,000 investment equals $100,000 risk. Savvy investors make another calculation, and that is what is their financial tolerance (FT). From our example, FT represents a number lower than the initial investment amount, and higher than zero.
Financial tolerance is the alarm clock that indicates the investment may be a bad one. If FT is hit, then an investor may rethink continuing the investment and salvage whatever money they can from this investment gone a-rye.
Revolut’s Latest Feature
The fintech company, Revolut, continues to develop their product and align it to be one of the best non-US tools to access the most significant financial market in the world, the US stock market. Previously, an investor could execute market, limit, and stop orders. The limit and stop orders, specifically, expired at the end of the trading day.
Now, limit and stop orders can have extended expiration dates. For beginner-investors, this means when placing a limit or stop order, rather than the order expiring at the end of the trading day, the expiration date could be chosen as far as six month’s away. This feature already exists in all major financial platforms in the United States and finally, Revolut has added it for their users. Amen!
A stop-loss order is the same money management concept as financial tolerance. Placing a stop price is the alarm clock that tells the story that the investment is spiraling, and it’s time to move on.
Watch the video at the top for a complete explanation of stop-loss orders.
When investing in the stock market, stop-loss orders protect your gains, and minimize your losses. Because Revolut now allows expiration dates to be extended as far as six months, then investors do not have to check daily or weekly their portfolio’s performance. In the event of an unexpected global market crash, stop-loss orders protect your investment from severe downside risk.
Strategically, the expiration date of the stop-loss order should be adjusted every six months. Also, the stop price cannot be lower than 50% of the stock's current price. Let’s look at the ETF, SPY 0.00%↑, and a 2-year stop-loss strategy.
An investor buys 100 shares of SPY in April 2020 at a price of $280. After completing the purchase, the investor then places a stop-loss order to expire in six months with a stop price of $150.
After every six months, the stop-loss order automatically expires and the investor places a new order and always adjusts the stop price. The investor understands that with a rising stock price, the stop price does not need to be so far away.
When the investor places the last stop-loss order in October of 2021, the stop price is $400. Coincidentally, in April 2022 prior to the order expiring, SPY’s price falls below $400. The stop loss triggers and sells 100 shares.
The investor profits $120 per share, and as you can see from the chart, SPY’s price continues its decline below $400.
Revolut’s latest update which allows investors to set expiration dates of stop-loss orders six months away is a “stock changer” and an individual investor can make safer and more secure investments as a result.
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