Limit and Stop Orders Concepts and Example (CFA Video)
Limit and Stop Orders Concepts and Example (CFA Video)
Question:
John bought Google at $400 during the 2008 economic downturn. He planned to buy Google shares again when it reaches $480. Mary shorted Google at $500 before the crisis, and she planned to buy Google share when it is below $390.
What kinds of orders should have John and Mary placed?
Answer:
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This question tests you:
- The definitions of limit, stop (and market) orders
- Market order type has nothing to do with your current position
By definition, a limit order is to buy (sell) a stock when the price is below (above) a certain price. This is to “limit the cost” and maximize the gain.
A stop order is to buy (sell) a stock when the price is above (below) a certain price. This is to stop the loss and minimize the loss.
In this case, John has placed a stop buy order and Mary has placed a limit buy order.
Note that the types of orders have nothing to do with their current positions.
Or you can view it as Limit order guarantees price or better with slippage. Stop guarantees execution not price, slippage can cause bad fills especially in fast market conditions. Limit gets you the better price (maximize gain as stated) versus a stop order whether you’re long or short, sell limit above market price (short), buy limit below market price (long), sell stop below price (short), buy stop above price (long). Other than that this info is +++++++