What is a common tool used to mitigate risk in an investment strategy?

Using stop-loss orders is a common and effective tool for mitigating risk in an investment strategy. A stop-loss order is an instruction given to a broker to sell a security when it reaches a certain price, thereby limiting potential losses. This mechanism allows investors to have better control over their investments by setting predetermined exit points that help protect against significant downturns in the market. By automatically executing a sell order when the price dips to the designated level, investors can minimize losses without needing to continuously monitor their holdings.

In contrast, while financial derivatives can be used to hedge risk, they also inherently carry their own risks and complexities, which may not always be suitable for every investor. Concentrated portfolios, which involve investing heavily in a limited number of assets or sectors, typically increase risk exposure rather than mitigate it. Equity financing pertains to raising capital by selling shares and does not directly address risk management in the context of investment strategy.