CFA Practice Question

There are 275 practice questions for this study session.

CFA Practice Question

The market price of stock X is now $30. An order specifies the stock must be bought once the price reaches $35. This order is likely to be a ______.

A. market order
B. limit order
C. stop order
Correct Answer: C

This is an example of a stop-buy order, which specifies that the stock should be bought if its price rises above a given limit.

User Contributed Comments 11

User Comment
Skrills why wouldn't it be B, a limit-buy order? can anyone clarify difference between stop and limit orders?
pandianki You can think of a limit-buy order as an instance where you think that the security is not worth the price it's trading at, but if it were to DROP to a reasonable price then you would like to BUY it at the bargain price but NO MORE than that.

You can think of a stop-buy order as an instance where you are awaiting some new news and you know that if the news is good then the price will go through the roof. If the price goes from $30 to $35, you know it will CONTINUE if the price hits $35, you know you're still getting a bargain because you're so confident that the price will keep rising.

In the first example, you use a LIMIT to ensure that you don't trade at an unacceptable price. (eg. "I'd rather not own it at all than buy it at THAT price")
In the latter example, you use it to make sure you profit from a rising stock or protect your loss from a falling stock (eg. "If it falls to $20, I want out, because it's just going to keep going down")
johntan1979 You don't set a buy limit order > current price because it will be filled immediately at the current price.
jonan203 if you are long a $20 stock with a $10 cost basis:

stop my profits from dropping (sell stop @ $17, turns into market order at $17 and can execute x < or = $17)

if you are short a $10 stock:

stop my losses from rising (buy stop @ $12, turns into a market order at $12 and can execute at x > or = $12)

limits are to sell or buy at your specified price or better.
gill15 I dont even think about. Just Use How(For Limit) and When(For Stop). Whenever something needs to be reached it's a Stop. Here ONCE(The When) the price reachs 35 buy --->Stop order.

Other way would be whens its acceptable to buy...the how...Dont buy unless its unless its under 35. Limit Order.
dmfz If you place a limit order at 35 and the next tick is below your limit then you will get the bestprice anyway.
farhan92 when would this be practical if the aim of the game is to buy low sell high why would someone place an order for a stock at a higher price.
edushyant As per Schweser Notes there are 2 primary reasons a trader would enter stop-buy order: 1. A trader with short position who want to limit losses from increasing stock price will place stop-buy order. 2. (Hard to believe but true) "You don't get paid for being right until the market agrees with you". With this in mind, when an investor believes a stock is undervalued, but does not wishes to own it until there are signs that other market participations are convinced of this undervaluation, may place a stop buy order at a price above the current market price !!
jodz327 Thanks's a little bit more clear!
khalifa92 Buy Order
Limit = Maximum 100 (stop buying)
Stop = Minimum 50 (start buying)

Sell Order
Stop = Maximum 50 (start selling)
Limit = Minimum 25 (stop selling)
khalifa92 i mixed sell and buy :P
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