Trading Securities - Trading Terminology

Terms used in trading securities that  you should be familiar with:

Bid – This refers to the price a market maker will pay for a security. It is the price an investor would get  if selling the security. In addition,  you are going to get a bid price if you are selling a stock.

Ask – It is also called an offer. This is the amount an investor would pay when buying the security. If you are buying a stock, you are going to get the Ask Price.

Spread – This is the difference between the Bid and Ask price. The spread serves as the payment to the market maker. Market Maker  is a trader who supplies prices and is ready to buy or sell at those given bid and ask prices. A market maker operates a trading book.

Trade Date-  The trade date is the date that a security trade actually takes place. You should be aware of the difference between  the settlement date and trade date.

Settlement Date -   This is the date that the securities trade must be accomplished. Take note, the government securities and options must be settled by the day after the trade.

Cash transactions - this refers to securities that should settle on the trade date. It is unusual for the trade to require a same-day settlement.

Regular way settlement - the accomplishment of a securities transaction by the buying broker; while the current regular way settlement is 3 full business days after the trade date, this can be different. Regular way settlement was the trade date plus five days, before computers were as effective as they are nowadays.

Record Date – The date set by the issuer to identify the holders of record. This date is important 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 permitted to an upcoming dividend. This happens two business days in advance the record date.

Floor Broker – These brokers handle only very big orders, such as 10,000 shares or more.

Market Maker – works in the over the counter (OTC) market, they are the counterparts of specialists on the NYSE. Market makers are always ready to buy or sell shares of assigned securities for their own accounts.

Day Order-  All orders are treated as day orders, except marked otherwise.

Good-till-cancelled (GTC) – an order that stays in effect until it is executed or the trader decides to cancel it. In the case that the order does not have an instruction, the order expires at the end of the day when  it was placed. This type of orders is usually cancelled by the broker-dealer after 30 to 90 days.

Short sale – This means selling shares loaned from the broker-dealer. If the rate decreases, the investor then buys the shares at a lower price and returns them to the broker-dealer.

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