Advanced Diploma of Financial Planning (ADFP) Practice Test

Which of the following best defines a limit order?

1. An order to buy or sell at the current market price

2. An order to buy or sell a security at a specific price or better

3. An order that cannot be fulfilled

4. An order that guarantees execution

The correct answer is: An order to buy or sell a security at a specific price or better

A limit order is best defined as an order to buy or sell a security at a specific price or better. This means that if you place a limit order to buy, the order will only be executed at the specified limit price or lower. Conversely, if you place a limit order to sell, it will only be executed at the specified limit price or higher. This type of order allows traders to have greater control over the prices at which they buy or sell securities, thereby managing their potential gains or losses more effectively. In contrast, an order to buy or sell at the current market price would be classified as a market order, which does not provide price control and executes immediately at the best available price. An order that cannot be fulfilled is not a recognized category of trading orders and would not accurately reflect the nature of limit orders. Lastly, an order that guarantees execution does not align with the characteristics of a limit order, as there is no guarantee that the order will be filled if the specified price is not reached or surpassed in the market.