What does a stop buy order do?

What does a stop buy order do?

• A. It instructs to buy if the price drops below a specified level
• B. It is executed to sell at the current market price
• C. It buys a security only after it has reached a specific price
• D. It limits losses by selling immediately

Answer: (C)

A stop buy order is designed to purchase a security only after its price has reached a predetermined level, which is typically above the current market price. This mechanism is useful for investors who anticipate that once a stock reaches a certain price, its momentum will likely continue to rise, making it advantageous to buy.

For example, if an investor believes that a stock currently trading at $50 will increase in value once it surpasses $55, they can place a stop buy order at $55. If the stock hits that price, the order triggers and buys the stock. This strategy allows investors to capitalize on upward trends while minimizing the risk of purchasing the stock too early, before any upward momentum is confirmed.

Understanding how stop buy orders work enables investors to make strategic decisions that align with their market analysis and investment goals.