CFA CFA Level 1 Level 1 Question of the Week – Equity Investments

Level 1 Question of the Week – Equity Investments

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    • exam_whiz
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      Danny and Jack, both equity analysts, are discussing the types of orders in equity markets.

      During their discussion, Danny makes the following statements –

      I: “Market orders are orders to buy or sell a security at the best price available.”

      II: “A ‘buy’ limit order is placed above the current market price.”

      Jack agrees with Danny and adds,

      III: “Stop loss orders are orders where a trader borrows stock, sells it, and then purchases the stock later to return the stock back to the original owner.”

      Which of the statements made by Danny and Jack is/are incorrect?

      • Both statements I and III are incorrect
      • Both statements II and III are incorrect
      • Only statement II is incorrect
    • jpowers212
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      I chose I and III because III is obviously incorrect. III is when you take a short position. I believe 1 to be incorrect over 2 because a market order does not guarantee the best price available at that time and a buy limit order is just a limit on the price you are willing to pay and can be placed at any price regardless if it is above or below the market price (of course you would most likely put it below the current market price).

      This is just my rationale of course. I would like to see what others think.

    • jpowers212
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      And after I did some research it seems that I am wrong. Statement I is correct according to Schwab.com. Well it says “…best price available at that time.” So maybe I am still right? I think the answers may be to vague. OP please help!

    • christine
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      Pretty certain II and III are wrong:

      • II: Buy limit orders are placed below the current market price (buy low sell high). It’s illogical to have a buy limit order above the current market price as that would be a market order (i.e. limit is higher than best available price, execute immediately).
      • III: He’s describing shorting a stock

      @jpowers212 ‘best price available’ means best price among all the bids available to the broker taking the order. So I don’t see anything wrong with statement I.

      Haven’t touched the L1 curriculum in years so relevant disclaimers apply 🙂

    • exam_whiz
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      Correct Answer:  B

      Limit orders are orders to buy or sell at a price different from the current market price. A ‘buy’ limit order is placed below the current market price. Orders where a trader borrows stock, sells it, and then purchases the stock later to return the stock back to the original owner are called short sale orders. Both statements II and III are incorrect.

    • shannondaily
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      Boo! I got it wrong. :neutral_face: 

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