What is a "stop-loss" order in trading?

What is a "stop-loss" order in trading?

• A. An order to buy a security when it reaches a certain price
• B. An order to sell a security when it reaches a certain price
• C. An order to hold a security indefinitely
• D. An order to sell securities before the market closes

Answer: (B)

A "stop-loss" order is designed to limit an investor's loss on a position in a security. It is an order placed with a broker to sell a security when it reaches a specified price, which is usually below the current market price. The primary goal of a stop-loss order is to protect against significant financial loss by automatically triggering a sale at the defined price point, allowing for a risk management strategy in trading. By setting a stop-loss order, the investor can effectively remove some of the emotional decision-making involved in trading, as the order will be executed automatically once the price condition is met. This mechanism ensures that an investor does not hold onto a declining security for too long, which could lead to more substantial losses. The other choices describe different types of orders but do not capture the essence of a stop-loss order. For instance, an order to buy when a security reaches a certain price pertains to a limit order, while an order to hold a security indefinitely does not involve any trading action. Similarly, selling before the market closes doesn't specify a price condition like a stop-loss does. Thus, option B accurately represents what a stop-loss order is.

A "stop-loss" order is designed to limit an investor's loss on a position in a security. It is an order placed with a broker to sell a security when it reaches a specified price, which is usually below the current market price. The primary goal of a stop-loss order is to protect against significant financial loss by automatically triggering a sale at the defined price point, allowing for a risk management strategy in trading.

By setting a stop-loss order, the investor can effectively remove some of the emotional decision-making involved in trading, as the order will be executed automatically once the price condition is met. This mechanism ensures that an investor does not hold onto a declining security for too long, which could lead to more substantial losses.

The other choices describe different types of orders but do not capture the essence of a stop-loss order. For instance, an order to buy when a security reaches a certain price pertains to a limit order, while an order to hold a security indefinitely does not involve any trading action. Similarly, selling before the market closes doesn't specify a price condition like a stop-loss does. Thus, option B accurately represents what a stop-loss order is.