Chapter 10 Part 3 Flashcards
Before an order can be processed, an
order ticket is completed. The broker will pass the order ticket to the appropriate area. Evety transaction executed by a broker-dealer follows the same processing order
processing order
Order Department (Wire Room); Purchase and Sales Department; Margin Department; Cashiering Department
Order Department (Wire Room)
This department transmits buy and sell orders by allocating orders to a specific exchange or product area
Purchase and Sales Department
After an order is completed, the P&S department records the transaction and compares the trade details with the broker-dealer on the other side of the trade (contra-broker) for the purpose of reconciling any trade discrepancies
Margin Department
This department enforces customer account rules with regard to payment and delivery. It maintains an account record for each customer and posts all trade activity
Cashiering Department
This is where funds and securities are received and disbursed
A market order is
the most common type of customer order. It does not specify a price. Instead, the client instructs the broker to buy or sell a stock at whatever price is available when the order reaches the floor of the exchange. A market order will always be executed, but the customer cannot be certain about the price. This can be a disadvantage with volatile stocks
A limit order places conditions on the
price at which an order can be executed. If the conditions cannot be met, the order will not be executed at that time. A limit order must be executed at the specified price or better
A buy limit order may only be executed at the
limit price or lower. Note that a buy limit order is normally placed at a price below the current market price of the stock. A sell limit order is placed above the current market price of the stock. Limit orders are usually given to specialists to hold on their books until the order can be executed
The disadvantage of a limit order is that the customer runs the risk that the order will
never be filled, since the stock may never reach the limit price
A sell limit order must be placed
“above the market and must be executed at the limit
price or higher. For example, if Morris had placed an order to buy Catnip at $50, the order could only have been executed at a price of $50 or less. If he had placed an order to sell Catnip at $50, it could not have been filled unless the price was $50 or more”
A stop order
“becomes a market order to buy or sell securities once the stock reaches a specified price, called the stop price. Once the order is activated, the investor’s order will be executed as soon as
possible, but there is no price guarantee”
A sell stop order is
always placed below the current market price of the stock. It is typically used to limit a loss or protect a profit on a long stock position
A buy stop order is
always placed above the current market price of the stock. It is typically used to limit a loss or protect a profit on a short sale
A customer who sells short is selling securities that
she does not own. The customer sells short in anticipation that the price of the stock is going to fall. The investor borrows shares in the stock from a broker-dealer. The investor can then purchase the shares at the lower price to cover the short position and make a profit, assuming the stock declines. But if the stock price rises instead, then the investor will need to purchase the shares at a higher price and will lose money
