Trading Basics

The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for a security. Narrower spreads indicate higher liquidity and lower transaction costs, while wider spreads suggest lower liquidity and higher trading costs.

Example: A stock has a bid of $49.80 and an ask of $50.00, creating a bid-ask spread of $0.20 (or 0.40% of th...

Owning a security or holding the right to buy it, with the expectation that its price will increase. For stocks, a long position means owning shares outright, with profit potential unlimited (as price rises) and maximum loss limited to the purchase price (if price falls to zero). For options, being long a call gives the right to buy at the strike price, while being long a put gives the right to sell, with maximum loss limited to the premium paid. Long positions reflect a bullish market outlook.

Example: An investor purchases 100 shares of ABC stock at $50 per share, establishing a long position worth $...

A broker-dealer firm that stands ready to buy and sell a particular security at publicly quoted prices, providing liquidity to the market. Market makers profit from the bid-ask spread (the difference between the price they pay to buy and the price they charge to sell) and are obligated to execute trades even when market conditions are unfavorable. By maintaining continuous two-sided quotes, market makers facilitate orderly trading and ensure investors can buy or sell securities without significant delays.

Example: ABC Securities serves as a market maker for XYZ Corp stock. When investor Maria wants to buy 500 sha...

The date when securities trades finalize, ownership transfers, and payment is due. Regular-way settlement is T+1 (one business day after trade date) for equities, U.S. Treasury securities, corporate bonds, and municipal bonds, and same-day for options. Cash settlement occurs on trade date (T+0). The U.S. moved from T+2 to T+1 settlement for most securities on May 28, 2024.

Example: If a client sells 100 shares of stock on Monday (trade date), the proceeds will be available in thei...

A bearish investment position where an investor sells borrowed securities (short stock) or sells an option contract as the writer (short option), expecting the price to decline. In short stock sales, the investor must buy back the securities later to close the position. Short stock positions have unlimited loss potential because there is no cap on how high the security price can rise. Regulation T requires 150% initial margin for short stock sales. Short positions require high risk tolerance and are suitable only for sophisticated investors with bearish market outlooks.

Example: Short Stock Example: An investor believes XYZ stock (currently $60) will decline. They borrow 100 sh...

The process of completing a securities transaction by matching buyers with sellers and finalizing the trade at a specific price. Execution involves transmitting orders to market venues (exchanges, market makers, ECNs), receiving fills, and confirming transaction details. Investment advisers and broker-dealers have a duty to seek best execution: the most favorable terms reasonably available considering price, speed, likelihood of execution and settlement, commission costs, and market impact. Execution occurs on the trade date, while settlement (actual exchange of securities and payment) typically occurs one business day later (T+1 for equities as of May 2024).

Example: An adviser receives a client order to buy 1,000 shares of XYZ stock at 10:00 AM when it is trading a...

The total number of shares or contracts traded in a security or market during a specific period (typically measured daily). High trading volume indicates strong investor interest and typically provides better liquidity, making it easier to buy or sell without significantly impacting the price. Volume analysis helps advisers assess execution quality and potential trading costs.

Example: Stock A trades 10 million shares daily with a tight $0.05 bid-ask spread, while Stock B trades only ...