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Difficulty: EasyTypes of Orders and Order Execution Strategies

An investor wants to purchase shares of a company currently trading at 45pershare,butisonlywillingtopay45 per share, but is only willing to pay 42 per share or lower. Which order type should the investor place to achieve this objective?

  1. A buy limit order entered at $42Answer
  2. B
    A buy stop order entered at $42
  3. C
    A sell limit order entered at $42
  4. D
    A sell stop order entered at $42

Answer

A buy limit order entered at $42
A buy limit order allows an investor to specify the maximum price they are willing to pay for a security. By placing a buy limit order at 42whenthemarketpriceis42 when the market price is 45, the order will only be executed at $42 or lower, matching the investor's goal.

Step-by-Step Solution

1
Identify the transaction direction and price condition.
The investor wishes to buy stock with a price constraint of paying no more than $42.
Knowing whether the order is to buy or sell narrows down the appropriate order execution category.
2
Compare the desired execution price to the current market price.
The target purchase price (42)islowerthanthecurrentmarketprice(42) is lower than the current market price ( 45).
An order to buy at a specific price below the current market requires a limit order.
3
Select the appropriate order type.
A buy limit order at 42ensuresexecutiononlyat42 ensures execution only at 42 or a lower price.
Limit orders guarantee price control (execution at limit price or better), though execution is not guaranteed if the market never reaches $42.

Key Concept

Buy Limit Orders
Estimated Time:45s
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Topics

Types of Orders and Order Execution Strategies