A sell-stop order is a stock order to sell an investment once it falls below current price levels. They can be used to limit losses or preserve profits. It is one of a number of different stock order types that investors can use to control risk while taking advantage of changing stock prices. Sell-stop orders can be made through traditional brokerage firms or online trading accounts and apps.

What is a sell stop order?

Sell-stop orders are a type of stock order that triggers a sale of a stock when it falls to a predetermined level.  

As 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. At that point, the stock is sold at prevailing market prices. Sell-stop orders are used to sell a security when it falls to or below today’s levels. They can also be used when short selling investments, setting a ceiling for selling rather than a floor. 

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. 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. Buy-stop orders can also work to limit losses when selling stock short, a strategy intended to profit from a falling share price.

How do sell stop orders work? 

Say an investor purchased ABC Co. for $50 a year ago. The shares now trade at $40. The investor is willing to keep holding ABC Co., hoping shares will change direction eventually, but wants protection against further losses. They decide to place a sell-stop order at $30, the price at which the ABC shares would be sold. 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. But if ABC Co. never falls to $30 or below, no transaction will take place. The investor can then cancel the sell-stop order or place one at a different price. 

Sell-stop orders can also be used to lock in gains. Imagine that instead of falling, ABC is trading at $60 a year later. 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. 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.

When do investors use sell-stop orders?

Investors use sell-stop orders when they want to set a floor for an investment to be sold. Sell-stop orders can help more passive investors set up a trigger price for their holdings to be sold so that they don’t have to spend a lot of time monitoring markets.

Sell-stop orders also can be combined with limit orders to define a price range for selling an investment.

Here is a sell-stop limit order example: An investor holds shares of ABC Co., which trade at $60 each. The investor wants to set up an exit strategy and decides that $55 is an acceptable level to sell. But the investor is also worried about a sudden plunge in ABC overnight, which could result in shares trading the next day much lower than $55 when the market opens. A sell-stop order would mean the shares would be sold at any time for $55 or less. But if the first trade the next day is at $45, that’s what the investor will receive.

To guard against this, the investor decides to place a limit price at $50, meaning the shares will not be sold below $50. The result is that the investor has a conditional order to sell in a range of $50 to $55. Like other stop and limit orders, if current prices aren’t in this range, no transaction takes place. 

Sell-stop order vs. limit order: What’s the difference?

Several important features distinguish sell-stop orders from limit orders. 

• In a sell-stop order, if a security trades at or below the stop price, a sale at the prevailing market price—a market order—will be executed. Because the order will occur at market prices which can fluctuate quickly, the sale price could be much lower than the stop price.
• In a limit order, shares will not be sold below a certain price. This can protect an investor from big, sudden declines. They can also be used to set a buy price ceiling.

Combining a sell-stop order with a limit order creates a range of prices at which the investment will be sold. A stop-limit order can help an investor sell their investment at a certain level without being forced to accept a very low price. 

What is a trailing stop order? 

Another type of stop order is a trailing stop order. These use a variable price to trigger a sale of the stock. That price can be a dollar amount higher or lower than the market price of the stock, or a percentage. If the price rises, the trailing stop price is updated to the price of the investment by whatever amount the investor has set up. But if price drops, the trailing price is unchanged, and the order will be carried out if the price hits the trailing stop price. 

For example, an investor owns ABC Co. shares, which have risen to $70. The investor wants to protect profits and places a trailing stop order to sell with a trailing stop price $2 below the current price. ABC then gains $5 to $75, which changes the trailing stop price to $73. The next day, ABC falls $1, but the trailing stop price stays at $73. The investor’s ABC holdings will be sold if shares fall to or below $73.

The bottom line

Sell-stop orders give investors a way to limit losses or take a profit by setting a price below market levels at which their investment will be sold. They’re useful for investors who can’t constantly watch markets, or don’t want to. They can allow an investor to make a plan instead of panic selling in the moment. 

Sell-stop orders are conditional market instructions. If the order never reaches the stop price, the investment won’t be sold. A big price decline during after-hours trading could force a sale well below the trigger price when the market opens in the morning. Investors can combine limit orders with sell-stop orders to create a range of prices at which the order will be executed to avoid this outcome.