CISI Professional Practice Exam 2025 – Complete Prep Guide

A brokerage firm has a specific responsibility when executing a stop-loss order, which is primarily to sell a security when it reaches a predetermined price. This mechanism is designed to limit an investor's losses or to lock in profits by automatically triggering a sale once the market price touches or falls below the specified stop price.

When a stop-loss order is placed, the brokerage firm's role is to monitor the market price of the security and execute the sale promptly once the stop price is reached. This execution is crucial because it helps investors manage their risk in volatile markets.

In contrast, executing an order at any price would not align with the purpose of a stop-loss, as it indicates a disregard for the predetermined threshold established by the investor. Holding the order until market conditions improve does not fulfill the immediate need to curtail losses or protect gains, which is the essence of the stop-loss strategy. Furthermore, automatic reinvestment of proceeds into safer securities goes beyond the intent of a stop-loss order, which specifically concerns the timing and execution of selling a particular security rather than reinvesting strategy. Thus, the brokerage firm’s primary function in this context is to ensure the security is sold at the specified stop price, safeguarding the investor's interests.