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Knight Capital Provides a Big Lesson for Individual Investors

If you’re a retail investor, the Fast Money pros say there’s an important takeaway from the whole Knight Capital trading mess.

Smaller investors who trade single stocks from home, have to protect their trades with limits, explains pro trader Steve Grasso, director of institutional sales trading at Stuart Frankel. “There is no such thing as a secure single stock.”

In other words, if you invest what you consider to be a sizable amount of money in a single stock, set a stop loss. In the event the stock declines below that level, the stock will be sold into the market.

The advice comes after Knight Capital shares tumbled 70% in about a week.

Knight Capital landed in the spot light last week after a technology glitch triggered errant trading that resulted in a multi-million dollar loss.

In order to meet its obligation Knight inked a deal to receive $400 million and in return a handful of companies that supplied the capital will receive a stake equal to approximately 70% of the company.

"That's very dilutive for existing shareholders," adds trader Joe Terranova, chief market strategist for Virtus.

“This underscores the risk that people take as a shareholder,” muses trader Jon Najarian, co-founder OptionMonster.com. "And it can happen at any time to any stock."

"If you can't shake-off a 70% decline in a week, you must trade with a stop loss," Najarian says.

And if you have an appetite for risk and are thinking about a flier – trader Stephanie Link, director of research at TheStreet, says don’t do it.

“Even after the cash infusion the inflows are abysmal. There’s still a lot of risk. This is not a place that I’d put money to work.

Posted by CNBC's Lee Brodie

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Trader disclosure: On August 6, 2012, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Joe Terranova is long SEPT. MINI S&P FUTURES; Joe Terranova is long VRTS; Joe Terranova is long MCD; Joe Terranova is long USB; Joe Terranova is long GS; Joe Terranova is long JPM; Joe Terranova is long YHOO; Joe Terranova is long SBUX; Joe Terranova is long WFM; Joe Terranova is long AAPL; Joe Terranova is long EMC; Joe Terranova is long NXPIZ; Stephanie Link is long AAPL; Stephanie Link is long MCD; Stephanie Link is long DIS; Stephanie Link is long SLB; Stephanie Link is long LRCX; Steve Grasso is long ASTM; Steve Grasso is long BA; Steve Grasso is long D; Steve Grasso is long FRO; Steve Grasso is long LNG; Steve Grasso is long MHY; Steve Grasso is long MO; Steve Grasso is long NVIV; Steve Grasso is long PFE; Steve Grasso is long S; Steve Grasso is long XLU; Jon Najarian is long call spreads in GMCR; Jon Najarian is long call spreads in OCN; Jon Najarian is long call spreads in SBUX; Jon Najarian is long call spreads in YELP; Jon Najarian is long call spreads in MON; Jon Najarian is long put spreads in HPQ; Jon Najarian is long put spreads in KCG; Jon Najarian is long CME; Jon Najarian is long CBOE; Jon Najarian is long CIGX; Jon Najarian is long GLUU

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