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After hours earning call is the perfect time for a stock price to go up or down significantly, as well as in a few minutes after the market open. The example of LinkedIn stock crashing is an example. As an individual investor, you will be late and by the time you are ready, the price has already crashed. The bad news reaches you after a few minutes later even if you are alert 24/7.

How do you protect your investment in such situations?

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    By placing a guaranteed stop-loss order when you first buy your stocks. Check if your broker provides them, and if they don't search for one that does!
    – Victor
    Dec 7, 2019 at 5:48
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    @wonderfulworld No. If he meant that he would have said that. What he said was a guaranteed stop-loss order (GSLO).
    – David Schwartz
    Dec 8, 2019 at 1:10
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    Simple: Stay out of the stock market.
    – Hot Licks
    Dec 8, 2019 at 2:50
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    FYI any technique for protecting against an unwanted event is called a hedge; that is where we get the expression "hedge your bets". You might use that keyword to research different techniques. But the fact that you are asking the question indicates that risky investments might not be right for you.
    – Eric Lippert
    Dec 9, 2019 at 17:24
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    @wonderfulworld: No, that is not the lesson to learn here. The lesson to learn is do not invest in single stocks if you are averse to risk. Instead choose an investment strategy that has lower volatility, like an index fund.
    – Eric Lippert
    Dec 11, 2019 at 16:12

6 Answers 6

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The classic answer to that dilemma comes from Will Rogers:

  • "Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it."

More practical ways of reducing losses are stop loss orders and options.

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    Except that stop loss does not work: money.stackexchange.com/questions/116805/…
    – juhist
    Dec 7, 2019 at 13:52
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    A stop loss protects you. However, it may not protect you to the extent that you want it to.
    – Bob Baerker
    Dec 7, 2019 at 14:12
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    @BobBaerker not really. if the first deal after the news is at 50% loss, your stop-loss will be executed at that price. there is no magic that executes a sell for your trigger point, if nobody buys at that price.
    – Aganju
    Dec 7, 2019 at 20:59
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    @Aganju - There's no guarantee that your order gets filled at 50% down. A stop loss gets executed at whatever price the market is at when your order reaches the front of the order book, not where the market opens after the gap. So as I said, a stop loss protects you. However, it may not protect you to the extent that you want it to.
    – Bob Baerker
    Dec 8, 2019 at 1:29
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    @BobBaerker , maybe I am reading you wrong, but no order gets 'executed' just because it is 'at the top of the order book' or because 'it likes to be executed' - there needs to be a buyer. If nobody buys, nothing gets executed.
    – Aganju
    Dec 8, 2019 at 2:03
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By buying put options for the stock.

A put option gives you a time-limited right to sell a stock for a specific price. Even if the actual price of the stock is below that price at the moment. This can be used as an insurance against an unexpected price drop, because it puts a maximum on how much money you can lose. But:

  • The put options cost you money, no matter if you use them or not. If the stock stays above the strike price, you spent money on an option for nothing.
  • The put options can only be used until a specific date. If you still hold the stock after the date expired, the options are useless and you need to buy new ones. Depending on how the stock has developed in the mean-time, the price for the put-options might also have changed.
  • Keep in mind that option trading is one of the more advanced techniques in stock trading. When you think that buying a stock would be too risky to buy without insuring it through a put option, then maybe you shouldn't invest in that stock at all. If you consider yourself a risk-averse investor, then it might be smarter to stay away from stocks of individual companies. Diversify by buying funds instead.
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    Good explanation. I'd add that buying a stock and buying a protective put simultaneously is equivalent to buying a call.
    – Bob Baerker
    Dec 7, 2019 at 15:29
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    but don't do it right before earnings, as everyone else has already done so and it will cause greater losses (in the put option) after earnings.
    – CQM
    Dec 8, 2019 at 3:08
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    @CQM - Around earnings is a good time to sell premium. If one wants to hedge near earnings when IV is inflated, it's a good idea to lay off some of that overpriced time premium paid out by selling some overpriced premium as well. A vertical works but the best low/no cost hedge would be a collar.
    – Bob Baerker
    Dec 8, 2019 at 3:51
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    Worth also saying that even though you can make a fortune buying and selling options, they also carry huge risks
    – Luffydude
    Dec 9, 2019 at 15:01
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    @Luffydude Can you elaborate on how and why options trading is risky?
    – Philipp
    Dec 9, 2019 at 18:21
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How to protect your investment in such situations?

By diversifying.

If a company whose stock you own goes bankrupt, and it's a problem for you, your stock portfolio is not diversified well enough.

In fact, I would argue you should be prepared for as many as 2-3 companies whose stocks you own going bankrupt.

By understanding into what you invest.

If you invest in a company that has been the market leader for 30 years, chances are it doesn't drop much in value, assuming the valuation at which you purchased the stock seemed reasonable.

The largest investments in a well-diversified portfolio should be just like that: major companies with large market cap. Your investment into them is unlikely to vanish.

By buying more.

If you diversify well, and invest into good companies at a reasonable valuation, and suddenly all of your investments have dropped 50% or so because the market index has dropped, it's a very good chance to move more money from bonds to stocks. It's also a very good chance to reduce your spending so that you have more money for investing.

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    Diversification does not protect you. It just spreads the risk. In 2008, of the 11 sector SPDRs, the top 3 performing sectors were Utilities (-43%), Health (-37%) and Staples (-31%). That's hardly saving yourself. Understanding what you invest in would not have helped you back then either (market down 50% during the GFC). Buying more does not protect you either. It may be a wise investment decision but it does not "save ourselves from large drops in stock price" and it increases your exposure to greater losses.
    – Bob Baerker
    Dec 7, 2019 at 14:20
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    @BobBaerker how quickly did those sectors rebound, compared to the S&P 500? (Shallower drops and faster rebounds is a form of protection for long-term investors staring at retirement.)
    – RonJohn
    Dec 7, 2019 at 15:39
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    @RonJohn - The question was, "How to save ourselves from large drops in stock price?" Suggesting that a subsequent rebound after a deep correction is a form of protection is a bit convoluted. As for those facing retirement, their strategy should be geared to more fixed income and less risk so that their retirement is not compromised. As for how quickly those sectors rebounded compared to the S&P 500, you know what you have to do if you want that answer...
    – Bob Baerker
    Dec 7, 2019 at 15:57
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    @jamesqf - It's a Captain Obvious statement to say that if you have a losing position and you hold on for 5 years, there's a good chance that it will recover. What does that have to do with saving ourselves from large drops in stock price?
    – Bob Baerker
    Dec 8, 2019 at 1:36
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    "By buying more" - you should probably emphasise this applies to the market as a whole, not individual companies. Stock prices of individual companies can just keep dropping until they reach 0. Experienced traders may use this information (combined with other signals) to predict individual prices, but it's risky and error-prone. For the market as a whole, as with any time you put money into the stock market, you should be prepared to leave the money there for at least a few years. It could drop further before increasing again and take long to recover.
    – NotThatGuy
    Dec 8, 2019 at 14:39
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By the end of the year, it was taken private at $196. You either need patience, or a magic trading formula that doesn't exist.

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    I believe the magic formula is: "Get elected to Congress, then trade on upcoming regulatory/legislative action."
    – Lawnmower Man
    Dec 9, 2019 at 21:48
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    @LawnmowerMan Totally legal, too!
    – user12515
    Dec 10, 2019 at 0:29
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By not gambling, and instead investing in something with guaranteed returns (e.g. government bonds), an FDIC insured savings account, or ownership of something whose value to you remains the same regardless of what the market does (i.e. a house).

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    since when are bonds guaranteed? lower risk, yes. No risk? No.
    – jiggunjer
    Dec 9, 2019 at 9:32
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    @glglgl: Value to you of having a place to live (as stated in the answer).
    – R.. GitHub STOP HELPING ICE
    Dec 9, 2019 at 12:13
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    @jiggunjer: Since forever. If you want to play the "well governments could refuse to pay them" game, that's true about currency too and you'd better go invest in canned food instead.
    – R.. GitHub STOP HELPING ICE
    Dec 9, 2019 at 12:19
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    @BobBaerker: I've edited bonds. Regarding house, It's not supposed to have anything to do with market value. The point is that, as OP asked for, owning the place you live insulates you from large drops in value of other things you own that might limit your ability to obtain housing in the future.
    – R.. GitHub STOP HELPING ICE
    Dec 9, 2019 at 14:18
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    @BobBaerker: Even if not a home (there are of course lots of good reasons not to buy one), ownership (and insurance) of the things you want to own long-term is a good mitigation for uncertainty of future value of things you might use to rent or purchase them later.
    – R.. GitHub STOP HELPING ICE
    Dec 9, 2019 at 15:26
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You have a investment firm do it for you in a diversified account.

They have a team of specialist dedicated to monitoring stocks, and will know about things long before you get notified.

So now you have 15 different stock in one group monitored by a team of professionals.

Of course they do charge some sort of fee, but you won't lose everything.

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  • Having you money managed doesn't protect against share price decline.
    – Bob Baerker
    Dec 11, 2019 at 18:30
  • @BobBaerker It increase the odds against it dramatically. The funds manager see the company is declining or about to decline sells off ALL the shares. Now when they go bankrupt none of your money is in said stock. On the chance you do lose some money it will be a small percentage of your portfolio. I have had under performing fund groupings, but haven't actually lost any money after 20+ years. So if there is a problem with a stock the total interest rate for the whole group goes down so instead of 15% interest now you only get 10%.
    – cybernard
    Dec 11, 2019 at 19:22
  • You can make the argument that fund managers have the ability to make better stock selections for you (that's debatable) but you can't make the argument that they can foresee that a company is about to decline. If that were the case, they and their investors would be rich since they'd never have any losers. Stocks often gap down and no one can predict that, not even the smartest quants at the best investment banks. Buying a low cost index ETF will achieve the same small loss percentage as managed money, except without the high management fees.
    – Bob Baerker
    Dec 11, 2019 at 19:30

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