3.1 Markets and Market Participants Flashcards
An exchange specialist is…
A member of the New York Stock Exchange who executes orders for other members and who also acts asa market maker charged with the responsibility of keeping an orderly market designated stocks.
Executes trades on an exchange, and must have enough capital to buy and sell from his own account in order to maintain an orderly and liquid market.
What is a market order?
Order sent immediately to the floor for execution without restrictions or limits.
It is executed immediately at the current market price and has priority over all other types of orders.
What is a limit order?
Order in which customer limits the acceptable purchase or selling price.
A limit order can be executed only at a specified price or better.
Better means lower in a buy order and higher in a sell order.
Describe a short sale.
Borrow stock from a broker/dealer to sell at the market.
Investor expects stock to decline enough to allow him to buy the shares at a lower price and replace the borrowed stock at a later date.
Unless stock goes to zero, investor must close position by buying stock.
What is a stop order?
Order that becomes a market order once the stock moves through a certain price, known as the stop price.
Two trades:
- Trigger: the trigger transaction at or through the stop price activates the trade.
- Execution: the stop order becomes a market order and is executed at the market price, completing the trade.
Stop limit order?
Order that, once triggered, becomes a limit order instead of a market order.
Types of orders by price?
Types of orders by time?
Price:
- Market
- Limit
- Stop
- Stop limit
Time:
- Day
- Good till canceled
- Fill or kill
- Immediate or cancel
- All or none
Define each type of order:
- Day
- Good till canceled
- Fill or kill
- Immediate or cancel
- All or none
- Day: expires if not filled by the end of the day
- Good till canceled: does not expire until filled or canceled
- Fill or kill: must be executed immediately in full or be canceled
- Immediate or cancel: must be executed immediately in full or in part; any part of the order that remains unfilled is canceled.
- All or none: must be executed in full but not immediately.
Define each type of order:
- Market
- Limit
- Stop
- Stop limit
- Market: executed immediately at the market price with no restrictions.
- Limit: limits the amount paid or received for securities.
- Stop: becomes a market order if the stock reaches or goes through the stop price.
- Stop limit: entered as a stop order and changed to a limit order if the stock hits or goes through the trigger price.
What is the minimum amount of shares that trade hands in a block trade?
10,000 or more shares
Location of OTC markets?
No central marketplace
Pricing mechanism of OTC markets?
Interdealer network.
Registered market makers compete to post the best bid and ask prices.
Negotiated market.
What defines a market maker?
They are broker/dealers who stand ready to buy and sell at least the minimum trading unit (usually 100 shares) in each stock in which they have published bid and ask quotes.
Have an inventory of units from who to buy and sell.
What is a broker?
Do they have an inventory of units for sale?
How do they make their money?
A broker is an agent who arranges trades for clients.
Brokers do not buy shares for inventory but facilitate trades between buyers and sellers.
They charge commissions.
What is a dealer?
Do they have an inventory of units for sale?
How do they make their money?
What is a markup?
Dealers, or principals, buy and sell securities for their own accounts. This practice is called position trading.
They sell and buy for and from their inventories.
Selling stock to a customer, dealer marks up the ask price.
Buying stock from a customer, dealer marks down the bid price.
A markup is the difference between the price the dealer would have to pay now and the actual price charged the client.
Can a firm act as both a broker and a dealer in the same transaction?
NO!
Violation is called making a hidden profit.
Firm quote?
Current bid?
Current offer?
Spread?
Firm quote - a market maker’s current bid and offer on a security.
Current bid - Highest price at which the dealer will buy
Current offer - Lowest price at which the dealer will sell
Spread - Difference between the bid and ask
Why would an investor use buy stop orders? Sell stop orders?
Buy Stop Orders:
- Protect against a loss in a short stop position.
- Protect a gain from a short stock position.
- Establish a long position when a breakout occurs above the line of resistance.
Sell Stop Orders:
- Protect against loss in a long stock position.
- Protect a gain from a long stock position.
- Establish a short position when a breakout occurs below the line of support (i.e., stock price declines below level)
Dividend declaration date?
Dividends are declared by the company’s board of directors.
Dividend record date?
Board specifies a date of record, that is, the date that a list will be made of the owners and only those who are on that list will receive the forthcoming dividend.
Dividend payable date?
Date on which the dividend checks are sent out to owners.
Ex-dividend date?
First day on and after which a purchaser of the stock will not receive the dividend.
