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Question

Difficulty: EasyTypes of Orders and Order Execution Strategies

An investor is reviewing fundamental order types used when trading securities. Which of the following statements regarding the mechanics of market, limit, and stop orders are correct?

  1. A buy limit order is entered below the current market price and can only be executed at the specified limit price or lower.Answer
  2. A sell stop order becomes an active market order once the stock price trades at or below the specified stop trigger price.Answer
  3. C
    A buy stop order guarantees that the trade will be executed at the exact stop price specified by the customer.
  4. D
    A market order guarantees price control, whereas a limit order guarantees immediate execution.

Answer

The correct statements are that a buy limit order is entered below the current market price to execute at the limit price or lower, and a sell stop order becomes a market order once the stock price trades at or below the stop price.
The statements confirming that a buy limit order executes at the limit price or lower and that a sell stop order activates into a market order once the stock trades at or below the stop price accurately reflect FINRA trading rules.

Step-by-Step Solution

1
Analyze limit order execution rules
Buy limit orders set a maximum purchase price and execute at the limit price or lower.
Limit orders guarantee price improvement or exact match, but do not guarantee execution if the market price never reaches the limit.
2
Analyze stop order trigger and execution rules
Stop orders become active market orders once triggered at or past the stop price.
A sell stop order triggers when market price falls to or below the stop price, then converts into a market order to sell at prevailing market prices.
3
Evaluate distractor misconceptions regarding price guarantees and order priorities
Stop orders do not guarantee execution prices, and market orders guarantee execution speed rather than price.
Confusing stop orders with price guarantees or swapping market/limit order priorities are common errors on order execution.

Key Concept

Order execution rules and price triggers for market, limit, and stop orders
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Topics

Types of Orders and Order Execution Strategies