The microglial surface protein Triggering Receptor Expressed on Myeloid Cells 2 (TREM2) plays a critical role in mediating brain homeostasis and inflammatory responses in Alzheimer’s disease (AD). The soluble form of TREM2 (sTREM2) exhibits neuroprotective effects in AD, though the underlying mechanisms remain elusive. Moreover, differences in ligand binding between TREM2 and sTREM2, which have major implications for their roles in AD pathology, remain unexplained. To address these knowledge gaps, we conducted the most computationally intensive molecular dynamics simulations to date of human (s)TREM2, exploring their interactions with key damage- and lipoprotein-associated phospholipids and the impact of the AD-risk mutation R47H. Our results demonstrate that the flexible stalk domain of sTREM2 serves as the molecular basis for differential ligand binding between sTREM2 and TREM2, facilitated by its role in modulating the dynamics of the Ig-like domain and altering the accessibility of canonical ligand binding sites. We identified a novel ligand binding site on sTREM2, termed the ‘Expanded Surface 2’, which emerges due to competitive binding of the stalk with the Ig-like domain. Additionally, we observed that the stalk domain itself functions as a site for ligand binding, with increased binding frequency in the presence of R47H. This suggests that sTREM2’s neuroprotective role in AD may, at least in part, arise from the stalk domain’s ability to rescue dysfunctional ligand binding caused by AD-risk mutations. Lastly, our findings indicate that R47H-induced dysfunction in TREM2 may result from both diminished ligand binding due to restricted complementarity-determining region 2 loop motions and an impaired ability to differentiate between ligands, proposing a novel mechanism for loss-of-function. In summary, these results provide valuable insights into the role of sTREM2 in AD pathology, laying the groundwork for the design of new therapeutic approaches targeting (s)TREM2 in AD.