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Series 7 practice questionmediumOrder Types — Stop Orders

A customer owns 500 shares of DEF stock, currently trading at $60. She places a sell stop order at $55. Which statement is TRUE about this order?

  1. AThe order will execute immediately at $55
  2. BThe order becomes a market order once the stock trades at or below $55✓ Correct answer
  3. CThe order guarantees the customer will receive exactly $55 per share
  4. DThe order will only execute if the stock rises to $55
Explanation

Why B — The order becomes a market order once the stock trades at or below $55

A sell stop order (also called a stop-loss order) is placed below the current market price and is triggered when the stock trades at or below the stop price. Once triggered, the stop order becomes a market order and is executed at the next available price. This means the actual execution price may be below $55, as market orders do not guarantee a specific price. Stop orders are commonly used to limit losses on existing positions.

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