What is a stop-loss order?

What is a stop-loss order?

• A. An order to buy a security at a set price
• B. An order to sell a security when it reaches a certain price to limit potential losses
• C. An automatic sale of securities based on volume
• D. A request to retrieve funds from an account

Answer: (B)

A stop-loss order is a specific type of order placed with a broker to sell a security when its price reaches a predetermined level. The primary purpose of a stop-loss order is to define the most a trader is willing to lose on an investment, thus protecting against significant financial losses. By setting this order, an investor can automate the selling process, ensuring that an asset is sold before its price falls too far, which helps to mitigate further losses. This strategy is particularly important in volatile markets, where price movements can be rapid and unpredictable. By establishing a stop-loss point, traders can maintain discipline in their trading approach and avoid emotional reactions that could lead to larger financial setbacks. In contrast, the other options describe different types of orders or actions unrelated to the sell limit set to minimize losses.

A stop-loss order is a specific type of order placed with a broker to sell a security when its price reaches a predetermined level. The primary purpose of a stop-loss order is to define the most a trader is willing to lose on an investment, thus protecting against significant financial losses. By setting this order, an investor can automate the selling process, ensuring that an asset is sold before its price falls too far, which helps to mitigate further losses.

This strategy is particularly important in volatile markets, where price movements can be rapid and unpredictable. By establishing a stop-loss point, traders can maintain discipline in their trading approach and avoid emotional reactions that could lead to larger financial setbacks.

In contrast, the other options describe different types of orders or actions unrelated to the sell limit set to minimize losses.