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 to purchase another is primarily to switch investment exposure. This practice allows an investor to adjust their portfolio by selling a security that may not align with their current investment strategy or market outlook and simultaneously acquiring a different security that may offer better potential for returns or fit their investment goals more effectively.

For instance, if market conditions change or if an investor's objectives shift, they may decide to sell a technology stock to invest in a more stable utility stock. By doing so, they are strategically reorienting their exposure to different sectors or asset classes to better match their risk tolerance or investment horizon. This method not only enables the reallocation of capital but also can enhance the overall performance of the portfolio.

While realizing losses for tax purposes, increasing transaction fees, and diversifying holdings without additional capital might be considerations or outcomes of selling and buying securities, they do not capture the primary intention behind the action of switching investment exposure. The core objective is to realign or optimize an investor's portfolio to better suit their financial goals.