What type of investors would typically use a stop loss order?

What type of investors would typically use a stop loss order?

• A. Short-term traders only
• B. Investors who are going long on a position
• C. Those who day trade exclusively
• D. Investors who do not monitor their positions

Answer: (B)

A stop loss order is a type of order placed with a broker to buy or sell once the stock reaches a certain price. Its primary purpose is to limit an investor's potential loss on a position. Investors who are going long on a position—that is, those who buy shares in anticipation that the price will rise—often use stop loss orders to protect themselves against significant declines in market value.

By placing a stop loss order, these investors can set a predetermined exit point for their investments. If the stock price falls to that level, the order is triggered, and the shares are sold automatically, helping to mitigate further losses in a declining market. This strategy allows long-term investors to manage risk effectively without needing to monitor their investments continuously.

On the other hand, while short-term traders and those who day trade might also use stop loss orders, they tend to place more emphasis on rapid movements and may employ different strategies tailored to their specific trading styles. Investors who do not monitor their positions might rely on stop loss orders, but the context of the question emphasizes the typical usage among those specifically purchasing securities with the expectation of price appreciation, aligning closely with long positions.