An investor holding 500 shares of XYZ stock currently trading at $50 per share wants to establish orders to manage downside risk and lock in potential gains. Which of the following statements regarding the placement and execution behavior of Sell Stop and Sell Limit orders for this position are correct?
- A Sell Stop order must be placed below the current market price of $50 to protect against potential losses.Answer
- BOnce triggered, a Sell Stop order guarantees execution at or above the specified stop price.
- A Sell Limit order must be placed above the current market price of $50 and will only execute at the limit price or higher.Answer
- DA Sell Limit order automatically converts into a market order as soon as the stock price touches the specified price.
Answer
The correct statements are that a Sell Stop order must be placed below the current market price to protect against downside loss, and a Sell Limit order must be placed above the current market price to execute at the specified price or higher.
Sell Stop orders are placed below the market price to protect long positions from downside risk, converting into market orders once triggered. Sell Limit orders are placed above the market price to take profits, guaranteeing execution only at the limit price or higher.
Step-by-Step Solution
Key Concept
Order placement rules and execution behavior for Sell Stop versus Sell Limit orders