Question

Sam placed a limit order to sell 500 shares of stock at $14 a share. Which of the following does Sam know for sure?

Answer 1

Answer:

His order may never execute and,

He could receive more , but not less, than $14 a share

Explanation:

A limit order places a pre specified price for buying or selling a security. Such a mechanism is used to limit or restrict the extent of losses the investor may suffer.

For example, an investor is desirous of purchasing the stock of XYZ Co whose current market price is $100. The investor places a limit that his buy order shall only be executed once the stock price touches $90 or lower than that.

In this case, the moment market price touches $90, the order shall be executed and the purchase shall be complete. The flip side being, the order may never be executed if the price never reaches the limit prescribed.

In the given case, Sam placed a sell limit order wherein 500 shares of stock would be sold once the price reaches $14 or higher. So in this case, if the price does reach $14, he would at least receive $14 or higher, but not lower than $14 since below this price, the order will not be executed.

Also, there is no guarantee that the order will be executed since it depends upon the share price reaching $14, which may or may not happen.