What is the purpose of an order to sell one security to purchase another?

What is the purpose of an order to sell one security to purchase another?

• A. To realize losses for tax purposes
• B. To switch investment exposure
• C. To increase transaction fees
• D. To diversify holdings without additional capital

Answer: (B)

The purpose of an order to sell one security in order to purchase another is primarily to switch investment exposure. This strategy allows an investor to adjust their portfolio by transitioning from one security to another based on changes in market conditions, asset performance, or investment strategy. For example, if an investor believes that a particular asset is overvalued or likely to underperform, they may sell that security and use the proceeds to invest in another security that is expected to provide better growth potential or align more closely with their risk tolerance.

By switching investment exposure, investors can actively manage their portfolios, align their investments with their financial goals, or respond to shifts in economic conditions. This process is fundamental to portfolio management, as it helps maintain or improve the investor's overall strategy and performance over time.

While realizing tax losses and diversifying holdings can be important aspects of investment strategy, they are not the primary purpose of the action described in the question. Additionally, increasing transaction fees is generally not a desired outcome of selling one security to purchase another, as investors typically aim to optimize their investment costs.