FINRA Series 7Processes and Confirms TransactionsMedium
A customer instructs their registered representative to sell 100 shares of ABC stock 'at the market, but do not execute if the price is below $49.' This type of order is known as a:
- AMarket-on-close order
- BStop-limit order
- CMarket-not-held order
- DStop order
Show answer & explanationAnswer & explanation
Correct answer: D. Stop order
A stop order becomes a market order once the stop price is reached or passed. In this case, 'do not execute if the price is below $49' indicates a stop price. If the stock falls to $49 or below, the order is triggered and becomes a market order to sell. If it were a stop-limit, it would have 'limit' in the instruction, e.g., 'sell at 49 limit 48'.
Why the other options are wrong
- A. A market-on-close order is executed as close as possible to the closing price and does not have a trigger price.
- B. A stop-limit order would include a limit price, such as 'sell at $49 limit $48'. The instruction given is simpler, indicating only a stop price.
- C. A market-not-held order gives discretion to the floor broker regarding time and price, but doesn't specify a trigger price like $49.
Stop Order (Sell)
An order to sell a security that becomes a market order once a specified stop price is reached or passed.
- Used to limit losses or protect a profit on a long position.
- Always placed below the current market price for a sell order.
- Once triggered, it executes at the best available price.
Memory trick: Stop, Drop, Market Pop!