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CFA Level I · CFA Level I Exam · Equity Issuance and Trading

A trader owns shares bought at 40.00 that now trade at 55.00. To protect the gain by selling automatically if the price falls to 52.00, the trader would most likely place a:

The trader would most likely place a stop sell order at 52.00. It stays dormant until the price falls to 52.00 and then becomes a market order, locking in most of the gain. A limit sell below market would fill immediately instead.

  1. Alimit sell order at 52.00
  2. Bstop sell order at 52.00Correct
  3. Cstop buy order at 52.00

Explanation

A stop sell (stop-loss) order becomes a market order once the price falls to the stop level, protecting gains. A limit sell at 52.00 below the market would execute immediately at the better bid price, not wait for a decline. A stop buy is for entering or covering positions as prices rise.

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