Series 7
Securities Transactions - Executing Trades
Good Delivery
The goal of executing a trade is to ensure good delivery - assurance that a security meets all the standards required to transfer title to the buyer. This means that a certificate has been delivered on the settlement date with proper denomination (round-lot), endorsements and endorsement guarantee.
| Exam Tips and Tricks Are mutilated certificates ever considered good delivery? The answer is yes, only if authenticated by the issuer\'s transfer agent. |
Good delivery applies to both stocks and bonds. Transactions in book-entry securities - in which the issuer keeps a record of who has purchased its securities but does not physically deliver them - are usually cleared automatically.
- Stocks - These securities must be transferred in round-lots. A round lot is generally 100 shares of stock. Anything less than this amount is considered to be an odd lot.
- So, what happens if a customer has placed an order for 90 shares? For one, that customer will most likely incur an odd lot differential, which is essentially a extra fee on top of regular transaction costs. Secondly, the broker-dealer might bunch the order together with one or more other odd-lot orders for the same security in order to process the transaction as a round-lot and reduce their client's fees. (Note that the broker-dealer must ask permission in order for bunching to occur).
- So, what happens if a customer has placed an order for 90 shares? For one, that customer will most likely incur an odd lot differential, which is essentially a extra fee on top of regular transaction costs. Secondly, the broker-dealer might bunch the order together with one or more other odd-lot orders for the same security in order to process the transaction as a round-lot and reduce their client's fees. (Note that the broker-dealer must ask permission in order for bunching to occur).
- Bonds - These securities must be delivered in face value denominations of $1,000 or $5,000.
- in the primary market, meaning the securities are issued directly by the corporation or agency seeking to raise funds, or
- in the secondary market, meaning the securities are now being bought and sold by investors.
| Look Out! This distinction determines how and when securities and money change hands. The following discussion focuses on equities and private-sector bonds covered by the FINRA\'s Uniform Practice Code. |
When, As, and If Issued (WI)
In the primary market, securities often trade when, as, and if issued, often abbreviated WI.
- A trade is done on WI because there are no physical certificates available reflecting the securities being traded, so a delivery date cannot be determined at the time of execution.
- The coupon rate on a bond is not finalized until the offering date, and the exact price and initial public offering date of a stock often are not determined until the bulk of the buyers are already lined up.
- In either event, the securities trade WI until all details are settled and the offering date arrives. A "when issued" settlement date is established through contact with the company or its agent, which determines that there is a sufficient market for the securities to be issued.
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