Investors use sell-stop orders when they want to set a floor for an investment to be sold. That way, they can give their investment a chance to appreciate further while guaranteeing a small gain and preventing it from potentially turning into a loss. The investor decides they’d like to make sure they’ll see at least a small profit on this investment and places a $55 sell-stop order. Imagine that instead of falling, ABC is trading at $60 a year later. Sell-stop orders can also be used to lock in gains. The investor can then cancel the sell-stop order or place one at a different price. never falls to $30 or below, no transaction will take place. The investor has decided on an acceptable level of loss for this investment, and in the meantime can wait and see what the stock does next. They decide to place a sell-stop order at $30, the price at which the ABC shares would be sold.
The investor is willing to keep holding ABC Co., hoping shares will change direction eventually, but wants protection against further losses. Buy-stop orders can also work to limit losses when selling stock short, a strategy intended to profit from a falling share price. Investors often use these when they think an investment will continue to appreciate, and the buy-stop order is used in an attempt to get in early when prices are moving higher. Sell-stop orders use a mechanism that’s akin to buy-stop orders, which are used to purchase an investment when it rises to a predetermined level. They can also be used when short selling investments, setting a ceiling for selling rather than a floor. Sell-stop orders are used to sell a security when it falls to or below today’s levels. At that point, the stock is sold at prevailing market prices.
Sell-stop orders are a type of stock order that triggers a sale of a stock when it falls to a predetermined level.Īs a type of stop order-sometimes known as trigger orders-a sell-stop order becomes a market order when a specific price set by the investor is reached.
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