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Difficulty: MediumTypes of Orders and Order Execution Strategies

An investor is monitoring a stock currently trading at 40pershare.Expectingapotentialpricesurgefollowinganupcomingearningsreport,theinvestorplacesanordertobuy100shareswithinstructions:′Buy100sharesat40 per share. Expecting a potential price surge following an upcoming earnings report, the investor places an order to buy 100 shares with instructions: 'Buy 100 shares at 45 Stop.' The next morning, the stock opens significantly higher due to strong financial results, with the opening trade occurring at $48 per share. How will this order be executed?

  1. It is triggered when the stock trades at or above 45andconvertstoamarketorder,fillingatthenextavailablepriceof45 and converts to a market order, filling at the next available price of 48 per share.Answer
  2. B
    It is filled at exactly the stop price of $45 per share, because the stop price acts as a guaranteed execution price.
  3. C
    It is executed at the previous day's closing price of $40 per share before the overnight market gap occurred.
  4. D
    It is automatically canceled because the stock opening price bypassed $45 without trading directly at the stop price.

Answer

The order is activated when the stock opens at or above 45andimmediatelyconvertsintoamarketorder,executingattheprevailingmarketpriceof45 and immediately converts into a market order, executing at the prevailing market price of 48 per share.
A buy stop order is placed above the current market price and remains dormant until a trade occurs at or above the stop price. When the stock opens at 48,ittriggersthe48, it triggers the 45 stop threshold immediately. Once triggered, the order converts into a market order and fills at the next available market price, which is $48 per share.

Step-by-Step Solution

1
Identify the order type and trigger condition
The order is a Buy Stop order at $45.
A buy stop order is entered above the market price and triggers when the market trades at or above the specified stop price.
2
Determine if the order was activated by the market price movement
The opening trade at 48ishigherthanthe48 is higher than the 45 stop price, so the order is activated instantly at the open.
Opening at 48satisfiesandpassesthroughthetriggerthresholdof48 satisfies and passes through the trigger threshold of 45.
3
Apply the execution rule for activated stop orders
Upon activation, the order becomes a market order and fills at the market opening price of $48.
Standard stop orders turn into market orders once triggered, guaranteeing execution at the best available current market price rather than guaranteeing a specific price.

Key Concept

Buy Stop Order Trigger vs. Execution Mechanics
Estimated Time:1m 0s
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Topics

Types of Orders and Order Execution Strategies