General Securities Representative (Series 7) Practice Exam

What does the term "protect against loss and lock in gain" refer to in stock trading?

1. Using margin accounts

2. Employing stop orders

3. Buying options

4. Conducting fundamental analysis

The correct answer is: Employing stop orders

The phrase "protect against loss and lock in gain" in stock trading primarily refers to employing stop orders. Stop orders are designed to limit an investor's loss on a position or to secure profits by setting a predetermined price at which the stock will be sold. When the stock reaches the specified stop price, the stop order is activated, turning it into a market order to sell the stock. This mechanism helps investors manage risk by providing a safety net if the stock price declines, while also allowing them to capture profits when the stock price rises. In contrast, using margin accounts increases potential gains but also amplifies potential losses, thus not directly fitting the goal of protecting against loss. Buying options can certainly provide some level of protection, particularly with protective puts, but it is not the primary method referenced in the phrase. Conducting fundamental analysis involves evaluating a company's financial health and market position, which is important for informed decision-making but does not inherently protect against loss or secure gains in the immediate sense like stop orders do.