What is a stop-loss order?

What is a stop-loss order?

• A. An order to buy a security once it hits a certain price
• B. An automatic order to sell a security at a specific price
• C. An order to hold a security indefinitely
• D. An order placed only during market openings

Answer: (B)

A stop-loss order is an automatic order to sell a security when it reaches a specific price, enabling investors to limit potential losses on a position. This type of order is particularly useful in managing risk, as it allows traders to set their maximum acceptable loss in advance, thus automating their exit strategy from an investment that is moving against them. When the market price of a security falls to the pre-determined stop-loss price, the order is activated and turns into a market order, selling the security to prevent further losses. This mechanism is essential for risk management, especially in volatile markets, where prices can fluctuate rapidly. The other options refer to different types of orders or strategies that do not align with the definition of a stop-loss order. For instance, buying at a certain price is unrelated to limiting a loss, holding indefinitely does not involve any active management of risk, and placing orders only during market openings does not pertain to the nature of a stop-loss order.

A stop-loss order is an automatic order to sell a security when it reaches a specific price, enabling investors to limit potential losses on a position. This type of order is particularly useful in managing risk, as it allows traders to set their maximum acceptable loss in advance, thus automating their exit strategy from an investment that is moving against them.

When the market price of a security falls to the pre-determined stop-loss price, the order is activated and turns into a market order, selling the security to prevent further losses. This mechanism is essential for risk management, especially in volatile markets, where prices can fluctuate rapidly.

The other options refer to different types of orders or strategies that do not align with the definition of a stop-loss order. For instance, buying at a certain price is unrelated to limiting a loss, holding indefinitely does not involve any active management of risk, and placing orders only during market openings does not pertain to the nature of a stop-loss order.