How to Handle Limit and Stop Orders on the Series 7 Exam
Here’s where the rubber meets the road. The Series 7 will expect you to know all about limit and stop orders. You can receive several types of orders from customers along with numerous order qualifiers. Here is an explanation of limit and stop orders and how to execute them.
A stop order is used for protection; it tries to limit how much an investor can lose. Depending on whether an investor has a long or short stock position, she may enter a buy stop order or a sell stop order:
Buy stop orders: These orders protect a short position (when an investor sells borrowed securities). A buy stop tells you to buy a security if the market price touches a particular price or higher. Investors who are short the stock make money when the price of the stock decreases; however, if the price increases, they lose money.
Sell stop orders: These orders protect a long position (when an investor purchases stock); they tell you to sell a security if the market price touches a particular price or lower. Investors who are long stock make money when the price of the stock increases; if the price decreases, they lose money.
A customer who’s specific about the price she wants to spend or receive for a security places a limit order; this order says the customer doesn’t want to pay more than a certain amount or sell for less. Depending on whether an investor is interested in buying or selling, she can enter a buy limit or a sell limit order:
Buy limit orders: Investors who want to purchase a security place these orders. A buy limit order is a directive to buy a particular security at the limit price or lower.
Sell limit orders: Investors who want to sell a security place sell limit orders. A sell limit order is a directive to sell a particular security at the limit price or higher.
Stop limit order
A stop limit order is a combination of a stop and limit order; it’s a buy stop or sell stop order that becomes a limit order after the stop price is reached.
One of the exhibits that you may see on the Series 7 exam is a ticker tape. You may have to determine the price at which a limit order is executed or a stop order is triggered. When you’re dealing with stop limit orders, remember that the order is first a stop order; after the stop order is triggered, it becomes a limit order.
BLiSS (buy limit or sell stop): The BL stands for buy limit, and the SS stands for sell stop. All BLiSS orders are entered at or below the market price of the security. Another thing to remember about BLiSS orders is that they get reduced on the ex-dividend date (the first day a stock trades without a dividend).
The BL in BLiSS helps you remember that the orders are placed BeLow the market price.
SLoBS (sell limit or buy stop): The SL stands for sell limit, and the BS stands for buy stop. All SLoBS orders are entered at or above the market price of the security. Unlike BLiSS orders, SLoBS orders remain the same on the ex-dividend date.
A good way for you to remember that SLoBS orders remain unchanged on the ex-dividend date is to remember the phrase “once a slob, always a slob.”
The following question tests your understanding of trigger and execution prices.
An investor enters an order to sell MNO at 34 stop. The ticker following entry of the order is as follows:
34.75, 34.60, 34.45, 34.20, 34.10, 33.95, 34.25, 34.30, 34, 33.80
At which prices was the order triggered and executed?
(A) Triggered at 33.95 and executed at 33.80
(B) Triggered at 34.10 and executed at 33.95
(C) Triggered at 33.95 and executed at 34.25
(D) Triggered at 34.25 and executed at 33.80
The correct answer is Choice (C). The investor wants to limit losses, so she enters an order to sell if the price dips too low.
The order was triggered at 33.95 and executed at 34.25. This is a sell stop order, which is a BLiSS order. BLiSS orders are triggered at or below the order price. The first transaction that was at or below 34 was 33.95, which is the trigger price. Because this is a stop order, it became a market order for immediate execution and was completed on the next trade (34.25).
The following question tests your ability to answer a stop limit question.
Julia Jingleham purchased 1,000 shares of XYZ Corp. at $45 per share. To limit her losses, a couple of weeks later, Julia places an order to sell 1,000 shares of XYZ at 43 stop 42.90 limit. The ticker following entry of the order is as follows:
43.64, 43.27, 43.30, 43.09, 42.95, 42.87, 42.85, 42.90, 42.94, 43
The order was triggered at
(A) 42.95 and executed at 42.87
(B) 42.95 and executed at 42.90
(C) 42.87 and executed at 42.94
(D) 42.87 and executed at 42.85
The right answer is Choice (B). Julia Jingleham placed this sell stop limit order to sell the stock if it drops to 43 but not sell it at less than 42.90 per share. Take care of the stop portion first, so look for where the sell stop order is triggered. Sell stop orders are BLiSS orders that are triggered at or below the stop price.
The first trade that’s at or below 43 is 42.95. Now that the order is triggered, it becomes a sell limit order at 42.90. Sell limit orders are SLoBS orders that are executed at or above the market price. When you move ahead from the point where it was triggered, the first trade that’s at or above 42.90 is 42.90.