Financial Industry Regulatory Authority (FINRA) Practice Exam 2025 - Free FINRA Practice Questions and Study Guide

A sell stop order is designed to protect against significant losses or to initiate short selling. This order becomes a market order when the security's price falls to the specified stop level. At that moment, the sell stop order triggers, and the order is executed at the best available market price.

This mechanism ensures that the order is activated in response to falling prices, allowing the investor to take action to limit their losses or capitalize on downward movements in the market. Timing is crucial in volatile markets, and the conversion upon reaching the stop level enables swift execution.

The remaining options do not accurately reflect the functioning of a sell stop order. The order does not convert at the end of the trading day; it only activates when the price condition is met. Rising prices have no bearing on the activation of a sell stop order, as it is inherently designed to be protective in a declining market. Additionally, the process does not rely on manual execution to convert; it is an automated response when the stop level is reached.