FINRA Series 7Processes and Confirms TransactionsEasy
XYZ stock is trading at $60. A customer believes that if the stock breaks through resistance at $65, it will continue to rally, and wants to buy the stock only if it trades at or above $65. Which order should the registered representative enter?
- ABuy stop-limit order, stop 65, limit 64
- BSell stop order at 65
- CBuy limit order at 65
- DBuy stop order at 65
Show answer & explanationAnswer & explanation
Correct answer: D. Buy stop order at 65
A buy stop order is placed above the current market price and becomes a market order once the stock trades at or through the stop price, which is exactly what the customer wants for a breakout purchase.
Why the other options are wrong
- A. Adding a limit below the stop price risks non-execution if the stock gaps above 65 quickly, unnecessarily complicating a simple breakout order.
- B. A sell stop is used to sell, not buy, and is irrelevant here.
- C. A buy limit only executes at or below 65, the opposite of what a breakout buyer wants.
Buy Stop Order
An order placed above the current market price that becomes a market order to buy once the stock trades at or through the stop price.
- Used to buy on a breakout or to limit loss on a short position
- Becomes a market order once triggered, no price guarantee
- Opposite of a sell stop, which is placed below market and used to protect long positions
Memory trick: Buy stops chase strength UP, sell stops protect longs DOWN.