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Over 700 finance terms, Shmooped to perfection.
This is an order to your broker to sell a stock at less than the current market price. Why would you want to do that? Usually because you think the stock is headed downward and you want to sell before it drops too low. It protects you from losing even more.
You have a stock that's worth $40 a share, but you think it's about to do much worse. You put in a sell stop order for $38. If the price reaches $38, your broker sells for $38 and you lose $2 per share. But a week later the stock drops to $30. You feel pretty good—you kept your losses from being too big.