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Question

Difficulty: EasyTypes of Orders and Order Execution Strategies

An investor holding shares of stock currently trading at 50placesanordertosellthesharesifthemarketpricedropsto50 places an order to sell the shares if the market price drops to 45 or below, accepting the next available price once activated. Which type of order has the investor placed?

  1. Sell stop orderAnswer
  2. B
    Sell limit order
  3. C
    Buy stop order
  4. D
    Principal dealer order

Answer

Sell stop order
The correct answer describes a sell stop order. A sell stop order is entered below the current market price (50)ataspecifictriggerprice(50) at a specific trigger price ( 45). If the stock trades at or below $45, the order is activated and immediately converts into a market order to sell at the best available current market price.

Step-by-Step Solution

1
Analyze the customer's goal and market position
The investor owns stock trading at 50andwantsprotectionagainstadeclinebelow50 and wants protection against a decline below 45.
Identifying whether the price trigger is above or below the current market price determines the appropriate order type.
2
Evaluate the order triggering mechanism
The order is set below the market price at $45 and turns into a market order upon reaching the trigger price.
Orders placed below the current market price that activate into market orders are stop orders designed for downside protection on long positions.

Key Concept

Mechanics of Sell Stop Orders
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Topics

Types of Orders and Order Execution Strategies