Which are true concerning stop orders?

A stop order is designed to limit potential losses in a declining market by establishing a set price at which the order will be activated. This mechanism allows investors to protect their investments by exiting a position when the stock price falls to a predetermined level. When the stock reaches this specified price, the stop order becomes active and is executed as a market order, helping to minimize losses as it triggers timely selling.

While the correct choice highlights the protective nature of stop orders, it's important to understand how this functions in context. The ability of stop orders to become market orders upon reaching a set price is also true; however, it's crucial to distinguish that this characteristic alone does not define their primary purpose, which is risk management. The incorrect options either misrepresent their function or confuse them with limit orders, which have distinct characteristics and aims in trade execution. Thus, stop orders serve as essential tools in investment strategies focused on loss prevention.