How to Protect Your Investments From Mini-Flash Crashes

As reported by USA Today’s Matt Krantz:

Q: I keep hearing about mini-flash crashes occurring. How can investors protect themselves from getting hurt?

A: Fast electronic trading has been a boon for investors looking for quick and low-cost trading. But there’s an ugly downside to high-speed digital investing that should cause all investors to see if they’re exposed.

The most famous flash crash occurred on May 6, 2010, when the Dow Jones industrial average sank 900 points, for apparently no reason, only to quickly recover. Investors who were caught off guard may have sold their shares for well below what they were worth as a result.

And so far, knock on wood, there hasn’t yet been a massive downdraft for the whole market quite like that event last year. But beneath the surface, almost every week, there is similar strange behavior going on with individual stocks. There have been several cases where a stock will crash by a large amount for just a few milliseconds, only to quickly recover.

But don’t let these mini flash crashes scare you out of the market. It’s just that these events are a reminder that it’s time to familiarize yourself with different types of stock trades that will protect you, for free, from such things.

The best way to protect yourself from getting hurt in a mini flash crash is by not using market orders. Market orders are commands you give to your broker to buy or sell a stock right now. Such orders can be dangerous if you’re one of the unlucky ones to have a market order to sell filled during a mini flash crash.

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