A sell stop order is an instruction to sell at the best available price after the price goes below the stop price. A sell stop price is always below the current market price. For example, if an investor holds a stock currently valued at $50 and is worried that the value may drop, he/she can place a sell stop order at $40. If the share price drops to $40, the broker sells the stock at the next available price. This can limit the investor's losses (if the stop price is at or above the purchase price) or lock in some of the investor's profits.
I was wondering how to understand limit the investor's losses (if the stop price is at or above the purchase price)?
I think a sell stop order is for selling an asset that is already owned. So if the stop price is at or above the purchase price, then it is to lock in the profits. If the stop price is at or below the purchase price, then it is to limit the loss. This is contrary to the last sentence in the quote.