When is a stop loss order triggered?

When is a stop loss order triggered?

• A. When a security's price increases significantly
• B. When a security's price falls to a specified amount
• C. When a security is loaned to the seller
• D. When a market anomaly is detected

Answer: (B)

A stop loss order is primarily employed to limit an investor's potential losses on a security. It is designed to automatically sell a security when its price falls to a predetermined level. This mechanism helps investors manage risk and exit a position during unfavorable market conditions.

In this context, when a security's price drops to this specified amount, the stop loss order is triggered, initiating a sale of the security at the market price to prevent further losses. This strategy is particularly important in volatile markets where prices can fluctuate dramatically. Therefore, utilizing a stop loss order is an effective way for traders and investors to safeguard their investments against significant downturns.

Other options do not accurately reflect the purpose of a stop loss order. For example, an increase in a security's price does not trigger a stop loss; rather, it may lead to a different type of order aimed at capturing profits. Similarly, loaning a security to the seller or detecting market anomalies falls outside the scope of a stop loss order's operational context.