CFA Level IEquity InvestmentsMedium
A trader wants to buy a stock only if its price falls to $45 or below, but does not want the order to remain open beyond the current trading session. Which order type best satisfies this instruction?
- AGood-till-canceled market order
- BDay limit order
- CStop order
- DAll-or-none order
Show answer & explanationAnswer & explanation
Correct answer: B. Day limit order
A day limit order specifies both a maximum price the trader is willing to pay ($45) and restricts the order's validity to the current trading day, exactly matching the trader's instructions.
Why the other options are wrong
- A. A market order has no price limit and would execute immediately regardless of price.
- C. A stop order triggers a market order once a price is reached but does not guarantee execution at or below $45.
- D. All-or-none refers to fill conditions on order size, not price or duration.
Order types: price condition vs. time-in-force
Orders are defined by both a price condition (market, limit, stop) and a time-in-force instruction (day, good-till-canceled, immediate-or-cancel).
- Limit orders specify a maximum buy or minimum sell price
- Day orders expire at the end of the trading session if unfilled
- Stop orders become market orders once a trigger price is reached
Memory trick: Price sets the ceiling, time-in-force sets the clock.