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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?
A. Buy stop
B. Sell Stop
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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