What does a contingent order do?

What does a contingent order do?

• A. It can only be executed if a specific condition is met
• B. It is executed automatically at the end of the day
• C. It remains open for a specified time period
• D. It includes a limit price for stocks

Answer: (A)

A contingent order is designed to be executed only when specific conditions are met, such as the price of a security reaching a predetermined level. This feature allows traders to manage their risk by ensuring that they only enter or exit a position under favorable circumstances, thereby providing a level of control over their transactions.

For instance, a trader might set a contingent order to buy a stock only if its price falls below a certain threshold. This enables strategic trading decisions based on market movements and is particularly valuable in volatile trading environments. The ability to attach specific conditions to the order helps traders align their trades with their market outlook and risk appetite.

The other options do not accurately describe the functionality of a contingent order. An automatic execution at the end of the day pertains more to day orders or market orders, while remaining open for a specified time is characteristic of good-till-canceled orders or similar. Including a limit price is a feature associated with limit orders rather than contingent orders, even though a contingent order can include specific price conditions.