Securities Industry Essentials (SIE) ExamUnderstanding Trading, Customer Accounts, and Prohibited ActivitiesEasy
A customer is interested in purchasing shares of a stock but wants to ensure they do not pay more than a specific price. Which type of order should the customer place?
- ABuy limit order
- BSell stop order
- CMarket order
- DStop order
Show answer & explanationAnswer & explanation
Correct answer: A. Buy limit order
A buy limit order specifies the maximum price the investor is willing to pay for a security. The order will only be executed at that price or lower.
Why the other options are wrong
- B. A sell stop order is used for selling and protecting profits or limiting losses, not for buying.
- C. A market order executes immediately at the best available price, which could be higher than desired.
- D. A stop order is used to trigger a market order when a certain price is reached, typically for protection against loss.
Buy Limit Order
An order to buy a security at no more than a specific price. This order may not be executed if the market price does not fall to or below the limit price.
- Sets a maximum purchase price.
- May not execute if market remains above limit.
- Used to get a better or specific price.
Memory trick: Market is fast, Limit is precise, Stop is protection.