Securities Trader Representative (Series 57) Practice Exam

A stop-loss order is designed to limit an investor's potential losses by triggering a sale of a security once it reaches a specified price. This order acts as an automatic mechanism for risk management, ensuring that if the price of a security declines to a predetermined level, the order will execute to sell the security, thereby helping to prevent further losses. This is particularly important in volatile markets, where prices can fluctuate rapidly.

In contrast, the other options represent different types of actions that do not align with the purpose of a stop-loss order. Holding a stock indefinitely means there is no selling action contingent upon price levels, while buying when prices fall does not involve limiting losses on an existing position. Additionally, an instruction to buy additional shares does not relate to selling at a loss but rather involves increasing an investment. Thus, the correct characterization of a stop-loss order is indeed as an order to sell a security at a predetermined price.