What is the function of a stop-loss order?

A stop-loss order serves the critical function of protecting investors from significant losses in their investment positions by triggering a sale once a stock reaches a predefined price point. This mechanism is particularly valuable in volatile markets, where prices can change rapidly. By setting a stop-loss order, an investor can define their maximum tolerable loss on a specific stock, helping them manage risk more effectively.

When the stock price falls to the designated stop-loss level, the order is executed automatically, selling the stock at the best available price, thus preventing further losses beyond that point. This proactive approach allows investors to maintain discipline in their trading strategy, potentially avoiding emotional decision-making during market downturns. Overall, the primary function of a stop-loss order is to limit losses, ensuring that an investment does not suffer more than the investor is willing to lose.