Question 2 of the Schweser self test equity section: Summary- Adam owns 100 shares - Brown is short 200 shares - Shares currently trading at $86 - Adams want to buy 100 more shares if the price rises to $90 - Brown wants to cover his short position and take profits if price falls to $75 Adams Brown A. Limit buy @ 90 Limit buy @ 75 B. Limit buy @ 90 Stop buy @ 75 C. Stop buy @ 90 Limit buy @ 75 The answer is C and I categorized Adam’s order at “limit buy @ 90” rather than “limit stop buy @ 90”. My understanding is that stop orders were paced to limit losses and since Adam has a long position, he will not have any losses if the price rises $4. My only thought on the reasoning is that in most cases a limit buy order is placed if the price falls below a certain value while in this case he wants to buy if the price rises. So given this unusual request order it should be looked at like someone with a short position who wants to limit the losses if the price rises to $90. Any thoughts?
I think the correct answer is B
A limit order is an order to buy (or sell) at a specific price, but the price has to be lower (higher) or equal to the limit price. A stop order is an to buy (or sell) at a specific price, here the price has to be higher (lower) than the stop price. Once the stop price is reached the order becomes a market order. http://www.mataf.net/forums/difference-limit-sto-t7475.html
I think there is something missing here or a typo in the question. why should adam wait for the price to go up to $90 before he buys. Note the current price is $86. I don’t understand the question anyway. Here’s what I know; A stop buy orders are placed by an investor in a short position to protect himself from losses in case the stock price begins to increase. Adams can only use this if he is in short position. Brown is good with a limit buy order which allows him to buy shares back at $75 in order to profit from the short sale transaction.
GTucker Wrote: ------------------------------------------------------- > Question 2 of the Schweser self test equity > section: > > Summary- Adam owns 100 shares > - Brown is short 200 shares > - Shares currently trading at $86 > - Adams want to buy 100 more shares > if the price rises to $90 > - Brown wants to cover his short > position and take profits if price falls to $75 > > Adams Brown > A. Limit buy @ 90 Limit buy @ 75 > B. Limit buy @ 90 Stop buy @ 75 > C. Stop buy @ 90 Limit buy @ 75 > > The answer is C and I categorized Adam’s order at > “limit buy @ 90” rather than “limit stop buy @ > 90”. My understanding is that stop orders were > paced to limit losses and since Adam has a long > position, he will not have any losses if the price > rises $4. My only thought on the reasoning is that > in most cases a limit buy order is placed if the > price falls below a certain value while in this > case he wants to buy if the price rises. So given > this unusual request order it should be looked at > like someone with a short position who wants to > limit the losses if the price rises to $90. > > Any thoughts? You have to look in terms of the investor strategy and what order will fit the strategy The number of shares owned is irrelevant. Brown is placing a limit buy to cover his short because he is taking his profit. The farther it falls the more he will make, but he feels at 75 he made enough and wants out. They are trying to confuse the situation because most people will cover a short position on rising prices. Adams believes that the rising price will indicate a trend and wants in if it crosses 90. So… what order will execute at 90 or above…a stop buy. If he placed a limit buy it would limit the price he pays to 90 or below…instant market order. What order will execute at 75 or below… a limit buy. If he put in a stop buy at 75 the order would be executed.
Yes, the answer is C. I have made a video for this, please take a look: http://minute-class.com/finance/limit-and-stop-orders-concepts-and-example-cfa-video/ 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. Note that the types of orders have nothing to do with their current positions.