Forum: money.stackexchange.com
Tags: <stocks>
Title: How can we save ourselves from large drops in stock price?
Question: 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?

Answers:
sents: text: By buying put options for the stock.
text: A put option gives you a time-limited right to sell a stock for a specific price.
text: Even if the actual price of the stock is below that price at the moment.
text: This can be used as an insurance against an unexpected price drop, because it puts a maximum on how much money you can lose.
text: But: The put options cost you money, no matter if you use them or not.
text: If the stock stays above the strike price, you spent money on an option for nothing.
text: The put options can only be used until a specific date.
text: If you still hold the stock after the date expired, the options are useless and you need to buy new ones.
text: Depending on how the stock has developed in the mean-time, the price for the put-options might also have changed.
text: Keep in mind that option trading is one of the more advanced techniques in stock trading.
text: 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.
text: If you consider yourself a risk-averse investor, then it might be smarter to stay away from stocks of individual companies.
text: Diversify by buying funds instead.
answer_details: author: money.stackexchange.com/users/20203/Philipp
score: 46
sents: text: How to protect your investment in such situations?
text: By diversifying.
text: If a company whose stock you own goes bankrupt, and it's a problem for you, your stock portfolio is not diversified well enough.
text: In fact, I would argue you should be prepared for as many as 2-3 companies whose stocks you own going bankrupt.
text: By understanding into what you invest.
text: 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.
text: The largest investments in a well-diversified portfolio should be just like that: major companies with large market cap.
text: Your investment into them is unlikely to vanish.
text: By buying more.
text: 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.
text: It's also a very good chance to reduce your spending so that you have more money for investing.
answer_details: author: money.stackexchange.com/users/36069/juhist
score: 19
sents: text: 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.
text: If it don't go up, don't buy it."
text: More practical ways of reducing losses are stop loss orders and options.
answer_details: author: money.stackexchange.com/users/67285/Bob Baerker
score: 4
sents: text: By the end of the year, it was taken private at $196.
text: You either need patience, or a magic trading formula that doesn't exist.
answer_details: author: money.stackexchange.com/users/187/JTP - Apologise to Monica
score: 2
sents: text: 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).
answer_details: author: money.stackexchange.com/users/4620/R.. GitHub STOP HELPING ICE
score: 2
sents: text: You have a investment firm do it for you in a diversified account.
text: They have a team of specialist dedicated to monitoring stocks, and will know about things long before you get notified.
text: So now you have 15 different stock in one group monitored by a team of professionals.
text: Of course they do charge some sort of fee, but you won't lose everything.
answer_details: author: money.stackexchange.com/users/45107/cybernard
score: 1

Summary of the answers:
An out option gives a time-limited right to sell stock at a specific price. If the drop in price of one stock is a big problem, then you portfolio isn't diversified enough.
A put option gives you a time-limited right to sell a stock for a specific price. Your stock portfolio needs to be well diversified. If you invest in a market leader, chances are the value won't drop much.