A customer wants an order that will be triggered only if the stock rises through a price above where it currently trades. Relative to the current market, where must a buy stop order be placed, and what type of protection does it typically provide?
- ABelow the current market, used to protect a profit on an existing long position from further decline.
- BAbove the current market, used to limit a loss on an existing short position if the stock rises. Correct
- CBelow the current market, used to buy in at a lower price after the stock has fallen through the stop.
- DAbove the current market, used to guarantee a purchase price no higher than the stop once it is elected.
Why A is wrong: This describes a sell stop, not a buy stop. A sell stop sits below the market to protect a long position, so both the placement and the strategy are wrong for a buy order.
Why B is correct: A buy stop is placed above the current market and is elected when the stock trades at or through the stop price, commonly to cap losses on a short sale or to buy on upside momentum.
Why C is wrong: A resting order to buy below the market at a set price is a buy limit, not a buy stop. A buy stop is never placed below the market, so this confuses the two order types.
Why D is wrong: Placement above the market is right, but a plain buy stop guarantees no price. Once triggered it becomes a market order and can fill above the stop, so the price guarantee is false.