A sell stop and a sell limit can carry the same price yet do opposite jobs. A sell stop sits below the market and gets a customer out as the stock falls. A sell limit sits above the market and sells only if the stock rises. Many order questions turn on small distinctions like this one.
An order is a customer's instruction to buy or sell. It names the security, the side and the quantity. The order type then says what the customer will give up: certainty of price or certainty of execution. Exchange rulebooks such as Cboe Rule 5.6 define the basic order types: market, limit, stop and stop-limit orders.
- Market order: An order to buy or sell at the best price available when it reaches the market. It fills promptly, but the customer learns the price only afterward.
- Limit order: An order to buy or sell at a specified price or better. A buy limit fills at the limit or lower, and a sell limit fills at the...
Common mistakes
- Reversing the quote: A market buyer pays the ask ($20.20 in a 20.00 bid, 20.20 ask quote), and a market seller receives the bid. The customer always gets the less favorable side.
- Calling a short put bearish: The word "put" misleads people. The writer profits if the price holds or rises, so a short put is bullish.
- Letting time and price discretion run on: It ends at the close of the business day it was given. Only a signed and dated written instruction from the customer extends it.
Bottom line
- A market order promises execution and a limit order promises the price or better; once triggered, a stop becomes a market order and a stop-limit becomes a limit order.
- Day orders expire at the close, and GTC orders stay open until executed or canceled.
- Buy limits and sell stops sit below the market, and on the ex-date Rule 5330 reduces open ones by the dividend unless the order is marked DNR.
- Choosing the asset, action or amount requires prior written authorization and principal approval under FINRA Rule 3260; time and price discretion ends with the business day unless the customer signs and dates a written extension.
Exam shortcut
Sketch the current price before you read the answer choices. Buy limits and sell stops sit below it ("BLiSS"). Those below-market orders are exactly the ones Rule 5330 reduces on the ex-date. After the trigger, a stop means a market order and a stop-limit means a limit order. In any quote, the customer pays the higher number and receives the lower one. For capacity, find the verb.
The full lesson (about 4,213 words, 28 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- C12
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