What is the purpose of a switch order?

• A. It allows trading between comparable securities
• B. It uses proceeds from a sale to buy a different security
• C. It specifies transactions that must occur simultaneously
• D. It is applicable only to mutual funds

Answer: (B)

The purpose of a switch order is to utilize the proceeds from the sale of one security to purchase a different security. This process allows investors to strategically reallocate their investments based on performance, risk tolerance, or changing financial goals. For instance, an investor may want to exit a position in one stock that they believe may underperform and simultaneously enter a position in another stock that they feel has better prospects. This kind of order streamlines the transaction, ensuring that the capital from the sale is efficiently redirected into the new investment without needing separate transactions that could incur additional costs or risks.

In the context of investment practices, the switch order is beneficial for investors looking to manage their portfolios actively and is often used within various asset classes, not limited strictly to mutual funds. The other choices specify different aspects of trading or investment strategies that do not align with the primary function of a switch order, focusing instead either on simultaneous execution, specific transaction types, or limitations based on the type of securities involved.