Sell Stop Orders: Protecting Unrealized Gains on Long Stock Positions
An investor purchased 400 shares of stock at $30 per share. The stock has appreciated to $68. The investor wants to lock in profits and protect against a sharp downward reversal, while remaining invested if the stock continues to rise. Which order should the representative enter?
To protect a profit on a LONG stock position, enter a SELL STOP order BELOW the current market price (e.g. at $64). If the stock falls to $64, it triggers a market order to sell.
Complete Analysis & Legal Rationale
Sell Stop orders are entered BELOW the current market price to protect a long stock position against downside losses. If the stock declines to or through the stop price ($64), the stop is activated (triggered) and immediately becomes a market order to sell at the best available market price. A Sell Limit order at $60 would execute immediately at the current $68 price (since $68 is 'better' than $60), selling the position right away.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
To protect a profit on a LONG stock position, enter a SELL STOP order BELOW the current market price (e.g. at $64). If the stock falls to $64, it triggers a market order to sell.
Fails to adhere to trade execution and settlement rules regarding B.
Fails to adhere to trade execution and settlement rules regarding C.
Fails to adhere to trade execution and settlement rules regarding D.
Official Standard: Sell Stop orders are entered BELOW the current market price to protect a long stock position against downside losses. If the stock declines to or thro