General Securities Representative (Series 7) Practice Exam

What does a sell limit order aim to achieve?

1. To lock in profits at a specific price or higher

2. To secure shares at a lower price

3. To fulfill a margin requirement

4. To initiate a buyback program

The correct answer is: To lock in profits at a specific price or higher

A sell limit order is designed to execute a sale of a security at a specific price or higher. This order type is particularly useful for investors who want to ensure that they sell their shares for a target price, thereby locking in profits. When the market price reaches or exceeds this predetermined price, the order is triggered, facilitating the sale. This strategy is effective in capturing profits when the investor anticipates that the price may not sustain the desired level for long. For instance, if an investor owns a stock currently trading at $50 and places a sell limit order at $55, the order will only execute once the stock's price reaches $55 or above, effectively locking in a profit from that trade. Since sell limit orders are specifically designed to capitalize on price increases, they do not serve the purposes of acquiring shares at a lower price, meeting margin requirements, or initiating buyback programs, which are distinct financial strategies with different objectives.