Question

Difficulty: EasyTypes of Orders and Order Execution Strategies

An investor wants to purchase shares of XYZ stock, which is currently trading at $45 per share. The investor believes the price will temporarily decline and wants to purchase the stock only if it can be acquired at$ 40 per share or lower. Which of the following order types should the investor place?

Buy Limit order at $40Answer
B
Buy Stop order at $40
C
Sell Limit order at $40
D
Sell Stop order at $40

Answer

The investor should place a Buy Limit order at $40.

A buy limit order is designed for investors who wish to buy a security only if the price is at or below a specified target price. Because the stock is currently trading at

45 and the investor wishes to buy at

40 or lower, a buy limit order guarantees that if the order is executed, the price paid will not exceed $40.

Step-by-Step Solution

1

Identify the transaction type and price objective.

The investor wishes to buy shares only if the market price drops to

40 or lower from its current price of

45.

Determining whether the investor is buying or selling and whether a price ceiling is desired dictates the proper order type.

2

Apply the mechanics of order execution strategies.

A buy limit order is placed below the current market price to guarantee that an execution occurs at the specified limit price ($40) or better (lower).

Limit orders set price boundaries on executions.

Key Concept

Buy Limit Order Mechanics

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Topics

Types of Orders and Order Execution Strategies