Examkin

Question

Difficulty: EasyTypes of Orders and Order Execution Strategies

An investor enters an order to sell shares of a stock if the market price drops to a specific price level. Once that price level is reached, the order is activated and automatically converted into a market order to be executed at the next available price. Which type of order did the investor place?

  1. Sell stop orderAnswer
  2. B
    Sell limit order
  3. C
    Buy stop order
  4. D
    Buy limit order

Answer

Sell stop order
A sell stop order is designed to protect a long stock position against downside losses. It remains inactive until the market price reaches or falls below the designated stop price. Once activated (triggered), it immediately turns into a standard market order, which guarantees execution at the next available market price.

Step-by-Step Solution

1
Identify the trigger mechanism described in the scenario.
The order stays inactive until the stock price drops to a specified level, which acts as the trigger price.
Orders triggered when the price falls to or below a specified threshold are stop orders designed to protect long positions or lock in gains.
2
Determine the execution state following activation.
Upon activation, the order immediately converts into a market order executed at the best available market price.
This dual-phase behavior (trigger first, then market order execution) specifically defines a stop order, distinguishing it from limit orders which require execution at or better than the limit price.

Key Concept

Stop Order Execution Mechanics
Estimated Time:45s
Rate this question

Topics

Types of Orders and Order Execution Strategies