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 Limit Orders vs Stop Orders 
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Joined: 27 Feb 2013
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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?


16 Mar 2013
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Joined: 27 Feb 2013
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I think the correct answer is B


16 Mar 2013
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Joined: 27 Feb 2013
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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- ... t7475.html


16 Mar 2013
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Joined: 27 Feb 2013
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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.


16 Mar 2013
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Joined: 27 Feb 2013
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Yes, the answer is C. I have made a video for this, please take a look:
http://minute-class.com/finance/limit-a ... nd-examp...
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.


16 Mar 2013
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Joined: 25 Nov 2016
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Just my quick hint to remember how to distinguish between them is to understand that stop buy order = limit sell order and limit buy order = stop sell order :D


25 Nov 2016
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