Trading Securities - Trading Terminology
You should also be familiar with the following terms used in trading securities:
- Bid - for the purposes of the exam, the bid only refers to the price a market maker will pay for a security; it's the price an investor would receive if selling the security.
- Ask - also called the offer, this is the price an investor would pay when buying the security.
- Spread - the difference between the bid and the ask price; the spread provides compensation to the market maker.
- Trade date - you should be aware of the difference between the trade date and the settlement date. The trade is the date on which a security trade actually takes place.
- Settlement date - this is the date by which the securities trade must be completed. Note that government securities and options must settle by the day after the trade.
- Cash transactions - this refers to securities that must settle on the trade date. It is rare for a trade to require a same-day settlement, but a test question might refer to this.
- Regular way settlement - the completion of a securities transaction by the purchasing broker; while the current regular way settlement is three full business days after the trade date, this can be changed. Before computers were as efficient as they are today, regular way settlement was the trade date plus five days.
- Record date - the date set by the issuer to determine the holders of record (i.e., thoseeligibleto receive a dividend payment). This date is necessary to know in order to determine the ex-dividend date.
- Ex-dividend date - this is the date when the buyer of a stock will not be entitled to an upcoming dividend. It occurs two business days before the record date.
You will probably have to identify either the ex-dividend date or the record date on a test question. The question is likely to ask what day the investor should buy the stock to still receive the dividend.
- Specialist -works at the NYSE and serves as an auctioneer for the stocks assigned to him/her. The specialist sets the opening price each day and must maintain a fair and orderly market in those stocks. The specialist may also buy and sell for his/her own account but may never compete with public orders.
- Floor broker - these NYSE brokers handle only very large orders, such as 10,000 shares or more.
- Market maker -works within the over-the-counter (OTC) market; they are the equivalent of specialists on the NYSE. Market makers are always prepared to buy or sell shares of assigned securities for their own accounts.
- Day order - all orders are considered day orders unless marked otherwise.
- Good-till-cancelled (GTC) - an order that remains in effect until it is executed or the investor decides to cancel it. If the order does not have an instruction, the order expires at the end of the day on which it was placed. GTC orders typically are cancelled by the broker-dealer after 30 to 90 days.
- Short sale - refers to selling shares borrowed from the broker-dealer. If the price drops, the investor then buys the shares at a lower price and returns them to the broker-dealer.
If you are unfamiliar with short selling, you can find out more in the tutorial Short Selling.