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Question (Relevant to the Series 7, Series 65, and Series 66):
James cannot believe XYZ is continuing to go down. He would like to give it a little more time to recover, but would like to protect himself if it continues to fall. What type of order would James most likely enter?
Answers:
A. Buy stop
B. Sell Stop
C. Market
D. Sell limit
Correct Answer: B. Sell Stop
Rationale: A sell stop order helps an investor avoid further losses if a stock price continues to drop. A stop order triggers a sale or purchase if the stock reaches a certain price. In this case, James would place the order below the current market and if the stock price decreased to his ‘stop price’, the order would become a market order and sell his position. The order would still allow for James to potentially recover if the stock goes up. If a market order was entered, the stock would be immediately sold at the next available ask price. A sell limit order is an order to sell at a specific price. A sell limit is usually used if the seller only wants to sell if a stock goes up to a certain specified price, but it hasn’t hit that price yet.
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