Investment SAE Practice Exam 2025 – Complete Study Resource

A limit order is defined as an instruction to buy or sell a stock at a specific price or better. This type of order is used by investors to control the price at which they buy or sell securities, ensuring they do not execute trades at unfavorable prices. For instance, if an investor places a limit order to buy a stock at $50, the order will only be executed if the stock's price reaches $50 or falls below that price. Conversely, if they set a limit order to sell at $50, the stock must reach that price or rise above it for the order to be executed.

The characteristics of a limit order provide investors with greater flexibility and protect them from sharp price fluctuations that can occur in the market. This contrasts with market orders, which are executed immediately at the current market price without any restrictions on price.

Other options do not accurately describe the nature of a limit order. The statement regarding executing only at market close doesn't align with how limit orders operate, as they can be executed when the specified price is met at any time during market hours. Similarly, a limit order is not inherently about purchasing stocks in bulk or providing unconditional options to buy. Instead, it emphasizes the price criteria that must be met for the transaction to occur,