Limit Order

A customer enters an order to buy 300 shares of Calder Foods at $28 while the stock is offered at $28.40. A limit order executes:

1. A.At the worst available priceThis is the exact inverse of the instruction. A limit sets a boundary the customer refuses to cross, so any fill must come at that price or better and can never be worse.
2. B.Only at the limit price or betterCorrect - price protection, no guarantee of execution.
3. C.Immediately at any priceImmediacy at any price describes a market order, which trades price certainty for execution certainty. A limit order takes the opposite side of that bargain, protecting the price and accepting that it may never fill at all.
4. D.Only at the closeExecution pegged to the close belongs to a market-on-close order. A limit order can trade at any moment in the session once the market reaches its price, so timing is not the constraint a limit imposes.

Why: A limit order executes only at the specified limit price or better.

A customer long Ashgrove Mining enters a sell stop at $40 with a limit of $39.75, and the next morning the stock gaps from $41 straight down to $37. A stop-limit order:

1. A.Is the same as a market orderA market order carries no price condition whatever, while a stop-limit carries two: a trigger level and a price boundary. Treating them as identical throws away both conditions that define the order.
2. B.Executes immediately at any priceThis is the market order again. The limit attached to this order is precisely the promise that it will not trade at any price, and the stop means it is not even live until the trigger is touched.
3. C.Cannot be used for stocksEquities are the most common venue for stop-limit orders. Nothing in the order type confines it to another asset class, so this asserts a prohibition that does not exist.
4. D.Becomes a limit order once the stop price is touchedCorrect - stop triggers a limit order.

Why: Once the stop price is touched, a stop-limit order becomes a limit order (executes only at the limit price or better).

Thaddeus tells his representative at Fernleigh Securities to buy Wexbury Growth Fund "but only if the price is 24.00 dollars a share or lower, otherwise skip it." The representative should explain that:

1. A.The firm may accept the limit order and hold it until the fund's next computed price satisfies it.A fund does not maintain a continuous market against which a resting limit could be worked. There is nothing for the firm to hold the order against.
2. B.Open-end fund shares are bought only at the next computed public offering price, so limit and stop instructions cannot be accepted.Correct. Forward pricing means the price is unknown at entry, and there is no continuous market, so price-contingent instructions are not available.
3. C.The order may be entered as good-til-cancelled and will execute on the first day the price condition is met.Good-til-cancelled instructions apply to exchange-traded securities. Fund orders are executed at the next computed price or not at all.
4. D.The representative may exercise time and price discretion to fill the order near 24.00 dollars.Time and price discretion cannot create a price-contingent fund order, because every order that day receives the same next computed price.

Why: Open-end fund shares are sold only at the next computed public offering price under forward pricing, and the price is not known when the order is entered. Because there is no continuous market and no bid to hit, a fund order cannot carry a limit or stop instruction. The customer may only decide how many dollars or shares to buy, not at what price.

Which statement best defines a limit order?

1. A.An order that sets the worst acceptable price and may not executeCorrect. Buy limits fill at the limit or lower, sell limits at the limit or higher, and neither is guaranteed to fill.
2. B.An order to trade immediately at the best available priceThat describes a market order. A limit order specifically refuses to trade at a price worse than the limit.
3. C.An order that becomes active only when a trigger price is reachedThat is a stop order. A limit order is live and displayable from the moment it is entered.
4. D.An order that must be executed in full or cancelledThat describes an all or none or fill or kill qualifier, which is about quantity rather than price.

Why: A limit order sets the worst acceptable price: a buy limit fills at the limit price or lower, a sell limit fills at the limit price or higher. Price is controlled, execution is not assured.