As the name implies, a stop-loss order is used to minimize your losses when a stock falls in price. In this particular type of trade, also known as "sell stop" order, you place a trade to sell once the stock price falls below a set price (the stop price). Once the stock reaches the stop price, the order then becomes a market order and is sold just like if you place a sell order manually at that very moment.

For example, say you owned 100 shares of Home Depot (HD), which you just purchased at $38.00/share. You want to sell if the stock falls to $35.00 to minimize your losses to $3.00/share. Using a sell stop order, your trade would be executed once the price falls to $35.00, thus limiting losses to approximately $3.00/share. Keep in mind that since the sell stop order becomes a market order once the stop price is hit, the order could be filled at a price other than $35.00 depending on how quickly your stock is falling. Thus, the stop price is only a "trigger" price and may not be the actual price at which the trade is filled. With a liquid stock this difference is likely to be only a few cents. In addition, commission charges are only charged if/when an order is filled.



Note that in the above graphic you must click the "sell" radio button, the "stop" radio button, and also enter in the stop price. After you place this order, you can view it (and cancel if desired) on the open orders screen.