FINRA Series 7Processes and Confirms TransactionsMedium
XYZ stock is trading at $45. A customer wants to buy the stock only if the price drops to $40 or lower. Which order should the representative enter?
- ABuy limit order at $40
- BBuy stop order at $40
- CSell limit order at $40
- DSell stop order at $40
Show answer & explanationAnswer & explanation
Correct answer: A. Buy limit order at $40
A buy limit order is placed below the current market price and will only execute at the limit price or lower, matching the customer's goal of buying only if the price falls to $40 or below.
Why the other options are wrong
- B. A buy stop is placed above the market to trigger buying on a rise, not a fall.
- C. A sell limit is used to sell at a price at or above the limit, not to buy.
- D. A sell stop is used to trigger a sale, not a purchase.
Buy Limit Order
An order to buy a security at a specified price or lower, placed below the current market price.
- Buy limits sit below market
- Guarantee price, not execution
- Opposite of sell limits, which sit above market
Memory trick: Buy Limits Low, Sell Limits High; Buy Stops High, Sell Stops Low.