How a Sell Stop Order is Used

A sell stop order is used to limit losses or protect profits. A trader buys a stock on the expectation that it will go up. If it declines instead, the trader wants to limit his loss by selling the stock. If a stock is showing a profit, the trader wants to make sure that he does not lose it.

How a Sell Stop Order Works

A sell stop order becomes a market order and is executed as soon as the stock trades at the specified price or below. If the sell stop is $20, as soon as the stock trades at $20, the sell stop becomes executable at the market and will usually be executed at or slightly below $20.

Day vs. Good-till-canceled

A sell stop order can be entered for a day or on a good-till-canceled basis. A day order expires at the end of the trading day if not executed; a good-till-canceled order stays on the books until the trader cancels or changes it.