Can You Place a Stop-Loss Order on a Mutual Fund?

A stop loss order is an order to sell (or buy) a stock at the prevailing market price once the stock reaches a specific level called the stop price. It is designed to limit an investor’s loss on a stock position if the market unexpectedly reverses.

Neither stop-loss orders nor the related stop-loss limit order apply to trading in mutual fund shares. This is because the only price applicable to shares in an open-ended mutual fund is the net asset value, which is calculated each day after market close.

Key points to remember

  • A stop-loss order cannot be placed for shares in a mutual fund because the unit price of shares in the fund is based only on one number, the daily net asset value.
  • A stop-loss order applies to stocks that are actively traded; it becomes a market order once the market reaches the stop price.
  • The net asset value of a mutual fund is determined by subtracting the value of a mutual fund’s liabilities from the value of its assets and dividing the result by the number of outstanding shares of a mutual fund.
  • A fund’s assets are the securities it invests in using mutual fund investors.
  • Regardless of what time an order to buy or sell fund shares is placed, it is only executed after the market closes and the net asset value has been established.

Trade Mutual Funds for Stocks

Mutual fund stock orders

To better understand this situation, it is worth looking at the structure of a mutual fund and how shares in a fund are bought and sold.

The traditional mutual fund is a open-end funds which issues an unlimited number of shares, depending on investor demand. Money flows in and out of open funds when investors buy and sell their stocks.

Investors can place orders throughout any business day to buy or sell mutual fund shares. However, no order can be executed before the market closes. When they are, they are all executed at the same price for that day. Indeed, the price of UCI units corresponds to the net asset value (NAV) of the fund and which is calculated after the close of the trading day.

Stock orders

The transaction process is different for stocks. In the case of shares, a company issues a finite number of shares and, after a initial public offering (IPO), these shares are traded secondary market. The price of a stock is determined by the forces of supply and demand – in other words, the Market sentiment that exists between buyers and sellers.

Stock trading shares on a stock swap. They can be bought and sold during trading hours. Stocks trade at prevailing market prices, which change throughout the trading day.

For example, investors can direct that orders for their shares be executed in the market or at a specific (limit) price. There are a variety of stock command types.

Stocks change hands a large number of times at different prices throughout a trading day.

A closed-end fund is not an open-end fund closed to new investors. A closed-end fund is an investment company whose shares trade on the open market, after an IPO. It does not sell to the public or redeem its shares.

Determination of net asset value

As we have mentioned, the price of UCI units is fixed, both when buying and when selling, according to their net asset value, or NAV. How is this value determined?

Net asset value = fund assets minus fund liabilities / number of shares outstanding

For example, the assets of a mutual fund are the shares of its wallet. These shares are valued according to their closing prices at the end of each day. The net asset value of a mutual fund is then determined by adding the value of all its investments and subtracting the value of its liabilities. This result is then divided by the number of shares issued by the mutual fund. Once the net asset value has been established, the orders of the fund’s clients can be executed.

What is a stop-loss order?

A stop-loss order is an order to sell (or buy) a stock in the market once the stock price reaches the stop price. It is used to reduce a trader’s exposure to losses if the market turns against their position.

Why can’t mutual funds accept stop-loss orders?

They cannot accept a stop-loss order because such an order is not the way mutual fund stocks are listed or traded. Shares in an open-end mutual fund are bought and sold at a single price that is set at the end of each business day after market close. Since only one price is available and orders are filled after market close, a stop-loss order does not apply.

When are mutual fund stock orders filled?

Regardless of the time of day an investor places their order to buy or sell fund shares, the order can only be executed after the price of the shares, or the net asset value (NAV ), was determined. The net asset value can only be determined after market close.

The essential

Mutual funds cannot be traded like stocks because they are priced differently. While stocks allow investors to place various types of orders, such as stop-loss orders, market orders, limit orders, good-till-cancel orders, etc., mutual fund stocks can only be bought or sold at one price per day.

Mutual fund trading limitations have prompted professional investors to seek alternatives. This resulted in the creation of the popular exchange traded fund. An ETF is a index mutual fund which is listed on an exchange and can be traded at different prices throughout the trading day, similar to stocks.