General Securities Representative (Series 7) Practice Exam

What type of market is accelerated by sell stop orders?

1. Bull market

2. Bear market

3. Volatile market

4. Neutral market

The correct answer is: Bear market

Sell stop orders are designed to trigger a market order to sell a security once its price falls to a specified level, known as the stop price. This order type is particularly useful for investors looking to limit potential losses in a declining market. In a bear market, prices are generally falling, and investors might be anxious about further declines. The presence of sell stop orders can create additional selling pressure as these orders are activated when the security's price breaks below the pre-set level. Consequently, this rush to sell can contribute to a quicker decline in the price of the security. In essence, the characteristic of a bear market is characterized by decreasing prices and increased selling activity. Sell stop orders amplify this trend by facilitating more aggressive selling as the market declines, which aligns with the typical behavior observed in bear market conditions.