Trading & Order Types Quiz
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Terms in this set
- Bid, Ask & the Spread The bid is the highest price a buyer (usually a dealer) will pay; the ask (offer) is the lowest price a seller will accept; the difference is the spread — the dealer's compensation and a gauge of liquidity.
- Market & Limit Orders A market order executes immediately at the best available price — execution is certain, price is not; a limit order sets a maximum buy price or minimum sell price — price is protected, execution is not.
- Stop & Stop-Limit Orders A stop order lies dormant until the stock trades at or through the stop price, then becomes a market order; a stop-limit order triggers the same way but becomes a limit order instead.
- Short Selling Selling borrowed shares hoping to buy them back cheaper; profits when the price falls, loses without limit when it rises, and must be done in a margin account.
- Principal vs. Agency Capacity A firm acts as agent (broker) when it matches a customer with a third party and charges a commission, and as principal (dealer) when it trades from its own inventory and earns a markup or markdown.
- Best Execution FINRA's requirement that firms use reasonable diligence to get customers the most favorable terms reasonably available — considering price, speed, and likelihood of execution — on every customer order.
- Trading Halts & Circuit Breakers Mechanisms that pause trading in stress: market-wide circuit breakers halt all equity trading when the S&P 500 falls 7% (Level 1), 13% (Level 2), or 20% (Level 3) from the prior close; single-stock halts pause one issue for news or volatility.