Pyxis Financial Training Manual Version 1.2

Financial Training Manual
Version 1.2
Pyxis Solutions Financial Training Manual Version 1.2
Pyxis Solutions LLC, Confidential
2/25/2009
Version 1.2
Chapter 1 - Introduction to Markets ............................................................... 3

Capital Market ........................................................................................................................................... 3 Regulatory Agencies.................................................................................................................................. 3 SEC ....................................................................................................................................................... 3 National Association of Securities Dealers NASD ............................................................................ 3 Types of exchanges.................................................................................................................................... 3 National Securities Exchanges.............................................................................................................. 3 NASDAQ.............................................................................................................................................. 4 Over The Counter (O-T-C) ................................................................................................................... 4 Electronic Communications Network (ECN) ............................................................................................ 5 Financial Information Exchange (FIX)................................................................................................. 6
Chapter 2 Brokerage Services ..................................................................... 8

Prime Brokerage Services.......................................................................................................................... 8 Global Custody ..................................................................................................................................... 8 Security borrowing / lending................................................................................................................. 8 Primary vs. Secondary markets............................................................................................................. 8 Full Service Brokerage Services................................................................................................................ 9 Account Types ...................................................................................................................................... 9 Account privileges ................................................................................................................................ 9
Margin Accounts:.............................................................................................................................................. 9 Options Account ............................................................................................................................................. 11
Principal vs. Agent.............................................................................................................................. 11
Chapter 3 - Trading Introduction.................................................................. 12

Going long ............................................................................................................................................... 12 Selling short............................................................................................................................................. 12 Bid Price .................................................................................................................................................. 12 Asked Price.............................................................................................................................................. 12 Types of Securities .................................................................................................................................. 13
Chapter 4 - Trade Processing........................................................................ 14

Types of Orders ....................................................................................................................................... 14 Order qualifiers........................................................................................................................................ 17 Priority of Orders..................................................................................................................................... 18
Chapter 5 - Securities Processing and Clearing............................................ 19

Clearing and Settlement........................................................................................................................... 20
Chapter 6 - Corporate Actions ...................................................................... 23

Dividends................................................................................................................................................. 23 Rights Issue.............................................................................................................................................. 25 Stock Split................................................................................................................................................ 25 Exchange Offer........................................................................................................................................ 25 Merger ..................................................................................................................................................... 25 Reverse Split............................................................................................................................................ 25 Bonus Issue.............................................................................................................................................. 26 Name Changes......................................................................................................................................... 26
Chapter 7 - Portfolio Management ............................................................... 27 Chapter 8 - Front Office Operations............................................................. 28

Equity derivatives .................................................................................................................................... 28 Fixed Income derivatives......................................................................................................................... 28 Forwards .................................................................................................................................................. 29 Futures ..................................................................................................................................................... 29
Glossary ........................................................................................................ 31
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Financial Training Manual Chapter 1 - Introduction to Markets
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Capital Market
The capital market (securities market) is the market for securities, where companies and the government can raise long-term funds. The capital market includes the stock market and the bond market. Financial regulators, such as the U.S. Securities and Exchange Commission, oversee the capital markets in their respective countries to ensure that investors are protected against fraud. The capital markets consist of the primary market, where new issues are distributed to investors, and the secondary market, where existing securities are traded.
Regulatory Agencies
SEC The Securities and Exchange Commission is a U.S. governmental agency responsible for the regulation of the securities industry. National Association of Securities Dealers NASD NASD Inc. is an industry organization representing persons and companies involved in the securities industry in the United States. It is also the primary Self Regulatory Organization (SRO) responsible for the regulation of its industry, with oversight from the Securities and Exchange Commission. The NASD was founded in 1936. Functions: Regulation and Licensure - NASD regulates trading in equities, corporate bonds, securities futures, and options, with authority over the activities of more than 5,025 brokerage firms, approximately 169,470 branch offices, and more than 658,170 registered securities representatives. All firms dealing in securities that are not regulated by another SRO, such as by the Municipal Securities Rulemaking Board ("MSRB"), are required to be member firms of the NASD. The NASD licenses individuals and admits firms to the industry, writes rules to govern their behavior, examines them for regulatory compliance, and is sanctioned by the SEC to discipline registered representatives and member firms that fail to comply with federal securities laws and NASD's rules and regulations. It provides education and qualification examinations to industry professionals. It also sells outsourced regulatory products and services to a number of stock markets and exchanges (e.g. American Stock Exchange ("AMEX") and the International Securities Exchange ("ISE"). The NASD founded the NASDAQ ("National Association of Securities Dealers Automated Quotations") stock market in 1971. In 2006, NASD de-mutualized from NASDAQ by selling its ownership interest.
Types of exchanges
National Securities Exchanges A "national securities exchange" is a securities exchange that has registered with the SEC under Section 6 of the Securities Exchange Act of 1934.
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There are currently ten securities exchanges registered with the SEC as national securities exchanges: American Stock Exchange - AMEX Boston Stock Exchange Chicago Board Options Exchange Chicago Stock Exchange International Securities Exchange National Stock Exchange (formerly the Cincinnati Stock Exchange) The Nasdaq Stock Market LLC New York Stock Exchange - NYSE NYSE Arca (formerly known as the Pacific Exchange) Philadelphia Stock Exchange NYSE: A corporation, operated by a board of directors, responsible for listing securities, setting policies and supervising the stock exchange and its member activities. The NYSE also oversees the transfer of members' seats on the Exchange, judging whether a potential applicant is qualified to be a specialist. The NYSE uses floor traders (people) to make trades, whereas the NASDAQ and many other exchanges are computer driven. NASDAQ NASDAQ (acronym National Association of Securities Dealers Automated Quotations system) is an American stock market. It was founded in 1971 by the National Association of Securities Dealers (NASD), who divested it in a series of sales in 2000 and 2001. It is owned and operated by The NASDAQ Stock Market, Inc., the stock of which was listed on its own stock exchange in 2002. NASDAQ is the largest electronic screen-based equity securities market in the United States. With approximately 3,200 companies, it lists more companies and on average trades more shares per day than any other U.S. market NASDAQ allows multiple market participants to trade through its Electronic Communication Networks (ECNs) structure, increasing competition. The Small Order Execution System (SOES) is another NASDAQ feature, introduced in 1987, to ensure that in 'turbulent' market conditions small market orders are not forgotten but are automatically processed. With approximately 3,200 companies, it lists more companies and, on average, its systems trade more shares per day than any other stock exchange in the world. NASDAQ will follow the New York Stock Exchange in halting domestic trading in the event of a sharp and sudden decline of the Dow Jones Industrial Average. In business, NASDAQ is often used as a non-acronym also.
Over The Counter (O-T-C) A security traded in some context other than on a formal exchange such as the NYSE, AMEX, etc. The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments such as
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derivatives, which are traded through a dealer network. In general, the reason for which a stock is traded over-the-counter is usually because the company is small, making it unable to meet exchange listing requirements. Also known as "unlisted stock", these securities are traded by broker-dealers who negotiate directly with one another over computer networks and by phone. Although NASDAQ operates as a dealer network, NASDAQ stocks are generally not classified as OTC because the NASDAQ is considered a stock exchange. As such, OTC stocks are generally unlisted stocks which trade on the Over the Counter Bulletin Board (OTCBB) or on the pink sheets. Be very wary of some OTC stocks, however; the OTCBB stocks are either penny stocks or are offered by companies with bad credit records. Instruments such as bonds do not trade on a formal exchange and are, therefore, also considered OTC securities. Most debt instruments are traded by investment banks making markets for specific issues. If an investor wants to buy or sell a bond, he or she must call the bank that makes the market in that bond and asks for quotes. Electronic Communications Network (ECN) ECN is the term used in financial circles for a type of computer system that facilitates trading of financial products outside of stock exchanges. The primary products that are traded on ECNs are stocks and currencies. ECNs came into existence in 1998 when the SEC authorized their creation. ECNs increase competition among trading firms by lowering transaction costs, giving clients full access to their order books, and offering order matching outside of traditional exchange hours. The functioning of ECNs In order to trade with an ECN, one must be a subscriber. ECN subscribers can enter orders into the ECN via a custom computer terminal or network protocols. The ECN will then match contra-side orders (i.e. a sell-order is "contra-side" to a buy-order with the same price and share count) for execution. The ECN will post unmatched orders on the system for other subscribers to view. Generally, the buyer and seller are anonymous, with the trade execution reports listing the ECN as the party. Some ECNs may offer additional features to subscribers such as negotiation, reserve size, and pegging, and may have access to the entire ECN book (as opposed to the "top of the book") that contains important real-time market data regarding depth of trading interest.
ECN fee structure ECN's fee structure can be grouped in two basic structures: a classic structure and a credit (or rebate) structure. Both fee structures offer advantages of their own. The classic structure tends to attract liquidity removers while the credit structure appeals to liquidity providers. However since both removers and
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providers of liquidity are necessary to create a market ECNs have to choose their fee structure carefully. In a credit structure ECNs make a profit from paying liquidity providers a credit while charging a debit to liquidity removers. Their fees range from $0.002 to $0.0027 per share for liquidity providers and $0.003 to $0.0025 per share for liquidity removers. The fee can be determined by monthly volume provided and removed, or by a fix structure, depending on the ECN, and it's known as a liquidity rebate, or credit. This structure is common on the NASDAQ market. In a classic structure, the ECN will charge a small fee to all market participants using their network, both liquidity providers and removers. They can also give lower price to large liquidity providers in order to attract volume to their networks. Fees for ECNs that operate under a classic structure range from $0 to $0.0015, or even higher depending on each ECN. This fee structure is more common in the NYSE, however recently some ECNs have moved their NYSE operations into a credit structure.
Financial Information Exchange (FIX) The Financial Information eXchange (FIX) protocol is an electronic communications protocol developed for international real-time exchange of information related to the securities transactions and markets. It is a selfdescribing protocol in many ways similar to other self-describing protocols such as the newer XML; however largely because its use and general acceptance predates XML it remains much more common than XML in securities trading systems. FIX Protocol, Ltd. is the company established for the purpose of ownership and maintenance of the specification. It owns the specification, while keeping it in the public domain. FIX is used by both the buy side (institutions) as well as the sell side (brokers/dealers) of the financial markets. Among its users are mutual funds, investment banks, brokers, stock exchanges and ECNs. The FIX protocol is a technical specification for electronic communication of trade-related messages. More precisely, the FIX protocol is a series of messaging specifications developed through the collaboration of banks, brokerdealers, exchanges, industry utilities and associations, institutional investors, and information technology providers from around the world. These market participants share a vision of a common, global language for automated trading of securities, derivatives, and other financial instruments. FIX is open and free, but is not software. Rather, FIX is a specification around which software developers can create commercial or open-source software, as they see fit. As the market's leading trade-communications protocol, FIX is integral to many order management and trading systems. Yet, its power is unobtrusive, as users of these systems can benefit from FIX without knowing the language itself. FIX messages are formed from a number of fields, each field is a tag value pairing that is separated from the next field by a delimiter SOH. The TAG is a string representation of an integer that indicates the meaning of the field. The value is an array of bytes that hold a specific meaning for the particular TAG. eg
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TAG 48 is securityID and is a string that identifies the security, TAG 22 is IDSource and is an integer that indicates the identifier class being used. In the main the value is readable text however fields can be encrypted and thus the value can be pure binary and include the normal delimiter SOH - binary fields are always preceded by a length field. The FIX protocol defines meanings for most TAGs and a range of TAGs is reserved for private use between consenting parties. The FIX protocol also defines sets of fields that make a particular message, within the set of fields some will be mandatory and others optional. The ordering of fields within the message is generally unimportant; however as noted length of encryption fields precede the encrypted fields also repeating groups are preceded by a count. The message is broken into three distinct sections: the head, body and tail. Fields must remain within the correct section and within each section the position may be important as fields can act as delimiters that stop one message from running into the next - the final field in any FIX message is TAG 10 (checksum). There are two main groups of messages - admin and application. The admin messages handle the basics of a FIX session. They allow for a session to be started and terminated and for recovery of missed messages. The application messages deal with the sending and receiving of trade-related information such as an order request or information on the current state and subsequent execution of that order. Since its inception in 1992 as a bilateral communications framework for equity trading between Fidelity Investments and Salomon Brothers, FIX has become the standard electronic protocol for pre-trade communications and trade execution. Although it is mainly used for equity transactions in the front office area, bond, derivatives and FX-transactions are also possible. One could say that whereas SWIFT is the standard for back office messaging, FIX is the standard for front office messaging. However, today, the membership of FIX Protocol Ltd. is extending FIX into block-trade allocation and other phases of the trading process, in every market, for virtually every asset class.
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Financial Training Manual Chapter 2 Brokerage Services Prime Brokerage Services
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As opposed to a full service broker, who services clients daily trade requests and manages cash on the local level, the prime brokerage serves a more macro purpose. Some services offered are global custody and securities borrowing / lending. Global Custody Global custody is the processing of cross-border securities trades, keeping financial assets safe and servicing the associated portfolios (on an international level.) Custodians hold a range of assets on behalf of their customers. These include equities, government bonds, corporate bonds, other debt instruments, mutual fund investments, warrants and derivatives. Institutional investors, money managers and broker/dealers are among those who rely on custodians and other market participants for the efficient handling of their worldwide securities portfolios. Custodians effect settlement of trades (that is, completion of a transaction, wherein the seller transfers securities or financial instruments to the buyer and the buyer transfers money to the seller) and provide safekeeping of the assets on behalf of clients. The services also include:

collection of income arising from the portfolios (dividends and interest payable) application of entitlements to reduced rates of withholding tax at source and reclaiming withheld taxes after-the-fact notification and dealing with corporate actions (such as bonus issues, rights issues and takeovers)
Security borrowing / lending In order to facilitate a clients short sales, the prime brokerage must borrow shares from their own in-house account and lend them to the client for the required time period (that is, until the client completes the transaction by buying the shares on the open market and returning them to the brokerage house.) Primary vs. Secondary markets A primary market is the market for new issues of securities, as distinguished from the Secondary market, where previously issued securities are bought and sold (either through an exchange or over the counter). A market is primary if the proceeds of sales go to the issuer of the securities sold. The issuance of new securities in the primary market is the service of a prime broker (such as an investment bank.)
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Financial Training Manual Full Service Brokerage Services Account Types 1. Joint Account 2. Corporate Account 3. Partnership Account
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Joint Account: A brokerage or bank account that is owned together (jointly) by two or more people. A joint account agreement is typically needed to open such an account. This agreement will detail whether transactions require the signatures of all parties or whether one party can take actions on his/her own. Corporate Account: When opening an account for a corporation, a copy of the Corporate Resolution must be obtained. The Resolution will list those individuals authorized to act on behalf of the corporation. If opening a margin or option account, both a Corporate Resolution and a Corporate Charter are required. The Corporate Charter will specify if these types of accounts are allowed. Partnership Account: To open an account for a partnership, certain information is required such as name, address, citizenship tax- identification number etc. In addition the account requires signature of all partners and a copy of the partnership agreement. The partnership agreement will specify those partners authorized to execute transactions on behalf of the partnership, Account privileges Margin Accounts: For the average person, the purchase of a home or automobile is usually made using a small amount of personal funds and a much larger percentage of money that's borrowed from another source. Most investment securities can be bought in exactly the same manner. When an investor decides to buy securities on margin a special account, known as a margin account, must be opened with a stock brokerage firm. The investor supplies a down payment and the firm lends the remaining balance for the transaction and actually purchases the securities for the investor. Up to 50% of the purchase price of securities bought in this manner can be borrowed funds. The investor can therefore buy up to twice as much market value of stock on margin as is possible using his or her own cash (for those securities which can be bought on margin; not all can). This use of borrowed funds to increase the percentage of profit is known as leverage. This leveraged position creates for the investor an opportunity to make more money for a given sum of investment dollars. At the same time, however, it creates the opportunity for losses which are not limited to the initial investment. These losses can occur very quickly and be quite extreme. Another consideration in margin trading is that interest is charged by the broker on the borrowed funds (known as the debit balance), which can be substantially more than the dividends and interest being earned by the purchased securities.
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Margin trading is a relatively sophisticated market technique and must be approached with great care. Due to the leveraged position, although greater gains can be achieved than will full cash transactions, the investor is exposed to the risk of deep losses. If the market value of the margined securities drops significantly, the brokerage firm will issue a maintenance- or margin call, which is a demand that the investor deposit more collateral money into the margin account. If the investor cannot or chooses not to deposit more funds, the broker will sell some or all of the securities to bring the account back to a properly margined condition. Normally these forced sales are executed in rapidly falling markets, which actually serves to "lock in" the investor's losses. Securities purchased on margin are not forwarded to the investor. They remain with the brokerage firm as collateral for the debit balance. Such securities are said to be in street name; they're held by the broker in the broker's name (the registered owner), but the investor is the true or beneficial owner. The brokerage firm sends the investor a monthly statement of the account showing the securities and cash that are being held for the investor (this is done for cash accounts, as well). The account will refer to the investor's position as "long" or "short": "long is a positive position in which the investor owns a particular stock; "short" refers to the position of owing stock which was borrowed to complete a sale. Trades are posted to the account on the settlement date (the date that the purchased securities must be paid for), which is generally three business days after the actual trade date. For options and government securities, the settlement date is normally the next business day. Maintenance Margin: Maintenance margin is the minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and NASD, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account. Keep in mind that this level is a minimum, and many brokerages have higher maintenance requirements of 30-40%. Maintenance margin is also referred to as "minimum maintenance" or "maintenance requirement". As governed by the Federal Reserve's Regulation T, when a trader buys on margin, key levels must be maintained throughout the life of the trade. First off, a broker cannot extend any credit to accounts with less than $2,000 in cash (or securities). Second, the initial margin of 50% is required for a trade to be entered. Finally, the maintenance margin says that an equity level of at least 25% must be maintained. The investor will be hit with a margin call if the value of securities falls below the maintenance margin. Margin Call: A margin call is a broker's demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. This is sometimes called a "fed call" or "maintenance call". You would receive a margin call from a broker if one or more of the securities you had bought (with
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borrowed money) decreased in value past a certain point. You would be forced either to deposit more money in the account or to sell off some of your assets. Leverage: Leverage is the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.
Options Account A brokerage account that is approved to hold option positions or trades. Principal vs. Agent Principal: The main party to a transaction, acting as either a buyer or seller for his/her own account and risk. Agent: A securities salesperson who represents a broker-dealer or issuer when selling or trying to sell securities to the investing public.
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Financial Training Manual Chapter 3 - Trading Introduction
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Going long The purchase of a stock, commodity, or currency for investment or speculation. Selling short A market transaction in which an investor sells borrowed securities in anticipation of a price decline and is required to return an equal amount of shares at some point in the future. The payoff to selling short is the opposite of a long position. A short seller will make money if the stock goes down in price, while a long position makes money when the stock goes up. The profit that the investor receives is equal to the value of the sold borrowed shares less the cost of repurchasing the borrowed shares. Suppose 1,000 shares are short sold by an investor at $25 apiece and $25,000 is then put into that investor's account. Let's say the shares fall to $20 and the investor closes out the position. To close out the position, the investor will need to purchase 1,000 shares at $20 each ($20,000). The investor captures the difference between the amount that he or she receives from the short sale and the amount that was paid to close the position, or $5,000. There are also margin rule requirements for a short sale in which 150% of the value of the shares shorted needs to be initially held in the account. Therefore, if the value is $25,000, the initial margin requirement is $37,500 (which includes the $25,000 of proceeds from the short sale). This prevents the proceeds from the sale from being used to purchase other shares before the borrowed shares are returned. Short selling is an advanced trading strategy with many unique risks and pitfalls. Novice investors are advised to avoid short sales because this strategy includes unlimited losses. A share price can only fall to zero, but there is no limit to the amount it can rise. Bid Price The price a buyer is willing to pay for a security. This is one part of the bid with the other being the bid size, which details the amount of shares the investor is willing to purchase at the bid price. The opposite of the bid is the ask price, which is the price a seller is looking to get for his or her shares. The use of bid and ask is a fundamental part of the market system, as it details the exact amount that you could buy or sell at any point in time. Remember that the current price is not the price for which you can purchase the security, but the price at which the shares last traded hands. If you want to get an idea of the price for which you can buy a security, you need to look at the bid and ask prices because they will often differ from the current price. Asked Price The price a seller is willing to accept for a security, also known as the offer price. Along with the price, the ask quote will generally also stipulate the amount of the
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security willing to be sold at that price. Sometimes called "the ask". This is the opposite of bid, which is the price a buyer is willing to pay for a security, and the ask will always be higher than the bid. The terms "bid" and "ask" are used in nearly every financial market in the world covering stocks, bonds, currency and derivatives. An example of an ask in the stock market would be $5.24 x 1,000 which means that someone is offering to sell 1,000 shares for $5.24. Spread: The difference between the bid and the ask price of a security or asset. Insiders: Any person who has knowledge of, or access to, valuable nonpublic information about a corporation. Examples of an insider include the directors and officers of a company. Stockholders who own more than 10% of equity in a company are also insiders. Types of Securities Equity - The ownership interest of common and preferred stockholders in a company. Equity is traded in shares of a company over national securities and/or over-the-counter markets. Debt - a bond or debenture is a debt instrument that obligates the issuer to pay to the bondholder the principal (the original amount of the loan) plus interest. Thus, a bond is essentially an I.O.U. (I owe you contract) issued by a private or governmental corporation. The corporation "borrows" the face amount of the bond from its buyer, pays interest on that debt while it is outstanding, and then "redeems" the bond by paying back the debt at maturity. Derivative - A financial instrument, traded on or off an exchange, the price of which is directly dependent upon the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement. Derivatives involve the trading of rights or obligations based on the underlying product but do not directly transfer property. They are used to hedge risk or to exchange a floating rate of return for a fixed rate of return. Derivatives will be explained in further detail in a later section.
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Chapter 4 - Trade Processing Order: The instruction, by a customer to a brokerage, for the purchase or sale of a security with specific conditions. There are several different types of orders, each offering different conditions. Types of Orders I. Market Order II. Limit Order III. Stop Order a) Buy Stop Order b) Sell Stop Order IV. Limit or better V. Stop- Limit Order a) Sell Stop- Limit Order b) Buy Stop- Limit Order Market Order: An order to buy or sell a stock immediately at the best available current price. A market order is sometimes referred to as an "unrestricted order". A market order guarantees execution, and it often has low commissions due to the minimal work brokers need to do. Be wary of using market orders on stocks with a low average daily volume: in such market conditions the ask price can be a lot higher than the current market price (resulting in a large spread). In other words, you may end up paying a whole lot more than you originally anticipated! It is much safer to use a market order on high-volume stocks, such as Microsoft or WalMart. Limit Order: An order placed with a brokerage to buy or sell a set number of shares at a specified price or better. Limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled. Limit orders typically cost more than market orders. Despite this, limit orders are beneficial because when the trade goes through, investors get the specified purchase or sell price. Limit orders are especially useful on a lowvolume or highly volatile stock Stop Order: An order to buy or sell a security when its price surpasses a particular point, thus ensuring a greater probability of achieving a predetermined entry or exit price, limiting the investor's loss or locking in his or her profit. Once the price surpasses the predefined entry/exit point, the stop order becomes a market order. Also referred to as a "stop" and/or "stop-loss order", Investors commonly use a stop order before leaving for holidays or entering a situation where they are unable to monitor their portfolio for an extended period. Stops are not a 100% guarantee of getting the desired entry/exit points. For instance, if a stock gaps down then the trader's stop order will be triggered (or filled) at a price significantly lower than expected.
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Traders who use technical analysis will place stop orders below major moving averages, trend lines, swing highs, swing lows or other key support or resistance levels. Buy Stop Order: An order to buy a security which is entered at a price above the current offering price. It is triggered when the market price touches or goes through the buy stop price. People using a buy stop hope to gain if momentum gains on a particular stock. If the price exceeds the price you have set, it will automatically trigger a market order Limit or better: Indicates an order to buy a security at the indicated limit price or lower, or to sell a security at the indicated limit price or higher. Stop- Limit Order: An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will be executed at a specified price (or better) after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy (or sell) at the limit price or better. The primary benefit of a stop-limit order is that the trader has precise control over where the order should be filled. The downside, as with all limit orders, is that the trade is not guaranteed to be executed if the stock/commodity does not reach the limit price. A stop order is an order that becomes executable once a set price has been reached and is then filled at the current market price. A limit order is one that is at a certain price or better. By combining the two orders, the investor has much greater precision in executing the trade. Because a stop order is filled at the market price after the stop price has been hit, it's possible that you could get a really bad fill in fast-moving markets. Also, some brokers don't accept stoplimits for all securities, specifically over-the-counter stocks. For example, let's assume that ABC Inc. is trading at $40 and an investor has put in a stop-limit order to buy with the stop price at $45 and the limit price at $46. If the price of ABC Inc. moves above $45 stop price, the order is activated and turns into a limit order. As long as the order can be filled under $46 (the limit price), then the trade will be filled. If the stock gaps up above $46, the order will not be filled.
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The chart below details which order types fall below / above the price as set by the (secondary) market.
Buy Stop-Limit Buy Stop Sell Limit
ORDERS ENTERED ABOVE THE MARKET
Market Price
Buy Limit Sell Stop Sell Stop-Limit
ORDERS ENTERED BELOW THE MARKET
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Financial Training Manual Order qualifiers I. Day Order II. Good til Cancelled (G.T.C) or Open Order III. At The Opening IV. At The Close V. Not Held (NH) VI. All or None VII. Immediate or Cancel VIII. Fill or Kill
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Day Order: Any order to buy or sell a security that automatically expires if not executed on the day the order is placed. A day order will not be executed if the limit or stop order prices were not met during the day. A way to increase the life of an order is to order securities on a 'good 'till cancelled' basis, where, as the name implies, the trade will not expire until it is cancelled or until it reaches a maximum time limit set by the brokerage. Good til Cancelled (G.T.C) or Open Order: An order to buy or sell a security at a set price that is active until the investor decides to cancel it or the trade is executed. If an order does not have a good-till-canceled instruction then the order will expire at the end of the trading day the order was placed. In most cases GTC orders are canceled by brokerage firms after 30-90 days. These type of orders are traditionally placed at price points away from the price of the stock at the time the order is placed. For example if a stock you held was currently $40 but you believe it will go to $50 at which point you would sell then you would use a GTC order. Once the GTC order to sell is placed if the price of the stock reaches $50 at any point over the next few months your shares will be sold. At The Opening: An order specifying that a trade is to be executed at the opening of the market, otherwise it's canceled. With this type of order you are not necessarily guaranteed the opening price. At The Close: An order specifying that a trade is to be executed at the close of the market, or as near to the closing price as possible. Its essentially a market order that doesn't get entered until the last minute (or thereabouts) of trading. With this type of order you are not necessarily guaranteed the closing price but usually something very similar. Not Held (NH): A market or limit order that gives the broker or floor trader both time and price discretion to attempt to get the best possible price. A person placing a not-held order exhibits great faith that the floor trader will be able to attain a better price than the current one. Although the floor trader has price and time discretion, he or she cannot be responsible for any losses that the shareholder may suffer as a result of this type of order. Often this type of order is applied to international equities to the fact that shareholders trust the trader's judgment more than they trust their own.
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All or None: A condition used on a buy or sell order to instruct the broker to fill the order completely or not at all. For example, if you send an AON order to your broker requesting 200 shares at $15, the broker will not fill the order unless s/he can get you the 200 shares at $15. This prevents you from having orders half filled before they expire. Immediate or Cancel: An order requiring that all or part of the order be executed immediately after it has been brought to the market. Any portions not executed immediately are automatically cancelled. This is used for large orders where filling quickly can be difficult. Fill or Kill: An order to fill a transaction immediately and completely or not at all. This type of order is usually for a large quantity of stock, and must be filled in its entirety or canceled (killed). Examples include market and limit orders requiring immediate executing. In reality, the fill-or-kill type of trade does not occur very often. Priority of Orders 1. Price 2. Time 3. Size
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Chapter 5 - Securities Processing and Clearing Below is a simple flowchart detailing the back-end clearing and settlement workflow of a clients trade:
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Financial Training Manual Clearing and Settlement
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Clearing House: An agency or separate corporation of an exchange responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery and reporting trading data. (Example: Futures clearing house - Clearing houses act as third parties to all futures and options contracts - as a buyer to every clearing member seller and a seller to every clearing member buyer. Each futures exchange has its own clearing house. All members of an exchange are required to clear their trades through the clearing house at the end of each trading session and to deposit with the clearing house a sum of money (based on clearinghouse margin requirements) sufficient to cover the member's debit balance. For example, if a member broker reports to the clearing house at the end of the day total purchase of 100,000 bushels of May wheat and total sales of 50,000 bushels of May wheat, he would be net long 50,000 bushels of May wheat. Assuming that this is the broker's only position in futures and that the clearing house margin is six cents per bushel, this would mean the broker would be required to have $3,000 on deposit with the clearing house. Because all members are required to clear their trades through the clearing house and must maintain sufficient funds to cover their debit balances, the clearing house is responsible to all members for the fulfillment of the contracts.) DTCC: The DTCC is the world's largest securities depository, holding trillions of dollars in assets for the members of the financial industry that own the corporation. It is also a national clearinghouse for the settlement of corporate and municipal securities transactions. The DTCC, a member of the Federal Reserve System, was created in 1999 as a holding company with two primary subsidiaries, the Depository Trust Company (DTC) and the National Securities Clearing Corporation (NSCC). DTC: The Depository Trust Company (DTC) established in 1973, was created to reduce costs and provide clearing and settlement efficiencies by immobilizing securities and making book-entry changes to ownership of the securities. It provides settlement services for all NSCC trades and for institutional trades, which typically involve money and securities transfers between custodian banks and broker/dealers. In 2004, DTC settled transactions worth $275.2 trillion, and made 243.1 million book-entry deliveries. In addition to settlement services, DTC brings efficiency to the securities industry by retaining custody of almost 2.5 million securities issues worth about $28.3 trillion, including securities issued in the United States and more than 100 other countries. DTC is owned by many companies in the financial industry, with the NYSE being one of its largest shareholders.
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NSCC: National Securities Clearing Corporation NSCC A subsidiary of the DTCC that provides centralized clearing, information, and settlement services to the financial industry. The NSCC and DTC play a major part in the settlement and clearing of securities transactions. They are the largest providers of these services worldwide. National Securities Clearing Corporation (NSCC), established in 1976, is the largest of the clearing corporations in terms of the transaction volumes it processes. In 2004, it processed 5.7 billion transactions valued at $100.4 trillion or an average of 22.9 million transactions each day, valued at $401.5 billion. NSCC provides clearing, settlement, netting, risk management, central counterparty services and a guarantee of completion for all street-side trades involving equities, corporate and municipal debt, American Depository Receipts, exchange-traded funds, unit investment trusts, mutual funds, insurance products and other securities. Through its netting process, NSCC reduces the value of financial obligations requiring settlement by as much as 97% each day. NSCC generally clears and settles trades on a T+3 basis. On May 10, 2004, the peak volume trading day in 2004, NSCC processed 30.2 million transactions valued at $494.6 billion. After netting the transactions and financial obligations by 97%, however, the value of obligations was $12.5 billion. FICC: Fixed Income Clearing Corporation FICC FICC is an agency that deals with the confirmation, settlement and delivery of fixed-income assets in the U.S. The agency ensures the systematic and efficient settlement of U.S. Government securities and mortgage-backed security transactions in the market. The FICC started operations at the start of 2003 and was created when the Government Securities Clearing Corporation and the Mortgage-Backed Security Clearing Corporation merged. The clearing corporation is divided into two sections: the government securities division and the mortgage-backed securities division. The Government Securities Division clears, nets, settles and manages the risk arising from a broad range of U.S. Government securities transactions for its member firms (brokers, dealers, banks and other financial institutions) and hundreds of correspondent firms that clear through these members. These transactions include original auction purchases of Treasury and Freddie Mac securities, buy/sell and repo transactions in Treasury and Government Agency securities, and GCF RepoTM transactions in Treasury and Government Agency securities as well as certain mortgage-backed securities. The Mortgage-Backed Securities Division operates two primary business units: Clearing services, which include trade comparison, confirmation, netting, and risk management, and Electronic Pool Notification (EPN) services, which allow customers to transmit/retrieve mortgage-backed securities pool information in real-time using standardized message formats. Mortgage-backed securities are bought and sold in the over-the-counter cash, forward and options markets. The key participants in these markets - the nation's original secondary markets for loan assets - are mortgage originators, government sponsored enterprises,
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registered broker/dealers, inter-dealer brokers, institutional investors, investment managers, mutual funds, commercial banks, insurance companies and other financial institutions. The Corporate, Municipal, and UITs (CMU) division of FICC provides all of its customers with RTTM a single pipeline, a common processing platform, and a standardized message format for the U.S. fixed income markets. RTTM reduces execution and settlement risk as well as costs because it allows customers to maximize the volume of trades that match on trade date, and ensures that trades are locked in and ready for settlement, moments after theyve been submitted. It also allows firms to fix any processing problems the same day when an error occurs, rather than waiting for the following morning, as in the previous batch processing system. OCC: Options Clearing Corporation OCC OCC is a clearing organization that acts as both the issuer and guarantor for option and futures contracts. The Options Clearing Corporation is regulated by both the SEC and the CFTC. The OCC is the largest clearing organization in the world and is owned equally by the American Stock Exchange (AMEX), Chicago Board Options Exchange (CBOE), International Securities Exchange (ISE), Pacific Exchange, and the Philadelphia Stock Exchange (PHLX) The Options Clearing Corporation (OCC), founded in 1973, is the world's largest equity derivatives clearing organization. OCC is dedicated to promoting stability and financial integrity in the marketplaces that OCC serves by focusing on sound risk management principles. By acting as guarantor, OCC ensures that the obligations of the contracts OCC clears are fulfilled. As the marketplace evolves, so do our clearing capabilities. Although OCC began as a clearinghouse for listed equity options, OCC has grown into a globally recognized entity that clears a multitude of diverse and sophisticated products. OCC operates under the jurisdiction of both the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC). Under its SEC jurisdiction, OCC clears transactions for put and call options on common stocks and other equity issues, stock indexes, foreign currencies, interest rate composites and single-stock futures. As a registered Derivatives Clearing Organization (DCO) under CFTC jurisdiction, OCC offers clearing and settlement services for transactions in futures and options on futures.
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Financial Training Manual Chapter 6 - Corporate Actions
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Dividends Dividends are payments made by a company to its shareholders. When a company earns a profit, that money can be put to two uses: it can either be reinvested in the business (called retained earnings), or it can be paid to the shareholders of the company as a dividend. Many companies retain a portion of their earnings and pay the remainder to their shareholders. Publicly-traded companies usually pay dividends on a fixed schedule, commonly annually, biannually or quarterly; however, they may declare a dividend at any time. Dividends are usually paid in cash. Sometimes dividends instead take the form of shares in the company (either newly-created shares or existing shares bought in the market). Exceptionally, dividends might take the form of shares in other companies or other assets. Overview The profits of a company can either be reinvested in the business or paid to its shareholders as a dividend. The frequency of these varies by country. In the United States dividends of publicly-traded companies are usually declared quarterly by the board of directors. In some other countries dividends are paid biannually, as an interim dividend shortly after the company announces its interim results and a final dividend typically following its annual general meeting. In other countries, the board of directors will propose the payment of a dividend to shareholders at the annual meeting who will then vote on the proposal. In the United States, a decision regarding the amount and frequency of dividends is solely at the discretion of the board of directors. Shareholders are explicitly forbidden from introducing shareholder resolutions involving specific amounts of dividends (SEC Form 8-A) Where a company makes a loss during a year, it may opt to continue paying dividends from the retained earnings from previous years or to suspend the dividend. Where a company receives a non-recurring gain, e.g. from the sale of some assets, and has no plans to reinvest the proceeds, the money is often returned to shareholders in the form of a special dividend. Forms of payment Cash - Cash dividends (most common) are those paid out in form of real cash. Such dividends are a form of investment income and are usually taxable to the recipient in the year they are paid. This is the most common method of sharing corporate profits with the shareholders of the company. Action credit cash to clients cash account per period (as stated in dividend announcement.) Stock - Stock or scrip dividends are those paid out in form of additional stock shares of the issuing corporation, or other corporation (e.g., its subsidiary corporation). They are usually issued in proportion to shares owned (e.g., for every 100 shares of stock owned, 5% stock dividend will yield 5 extra shares). This is very similar to a stock split in that it increases the total number of shares while lowering the price of each share and
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does not change the market capitalization or the total value of the shares held. Action credit security to clients securities account per period (as stated in dividend announcement.) Cash and stock In some instances, the dividend can be paid out as a combination of both cash and stock (in pro-rated amounts per share). Action client is credited cash to cash account and securities (as a percentage per share) to securities account (per period as stated in dividend announcement.) Cash or stock - Sometimes, the client is presented with the option of receiving the dividend in either cash or stock. Action the client is notified of the option (through client information management) and then sends a reply to the broker. Once the broker receives the reply, he then credits the appropriate amount of cash and/or stock into the clients account. DRIPS - dividend reinvestment plan. A DRIP allows for the automatic reinvestment of shareholder dividends in more shares of Companys stock. Action the clients account is credited cash from the dividend, then simultaneously debited that amount of cash and credited the pro-rated portion of securities into his securities account. This transaction is never presented to the client, it only occurs on the back-end. Dates - Dividends must be "declared" (approved) by a companys Board of Directors each time they are paid. There are four important dates to remember regarding dividends. These are discussed in detail with examples at the Securities and Exchange Commission site Declaration date - The declaration date is the day the Board of Directors announces its intention to pay a dividend. On this day, a liability is created and the company records that liability on its books; it now owes the money to the stockholders. On the declaration date, the Board will also announce a date of record and a payment date. Ex-dividend date - The ex-dividend date is the day after which all shares bought and sold no longer come attached with the right to be paid the most recently declared dividend. This is an important date for any company that has many stockholders, including those that trade on exchanges, as it makes reconciliation of who is to be paid the dividend easier. Prior to this date, the stock is said to be cum dividend ('with dividend'): existing holders of the stock and anyone who buys it will receive the dividend, whereas any holders selling the stock lose their right to the dividend. On and after this date the stock becomes ex dividend: existing holders of the stock will receive the dividend even if they now sell the stock, whereas anyone who now buys the stock now will not receive the dividend. It is relatively common for a stock's price to decrease on the ex-dividend date by an amount roughly equal to the dividend paid. This reflects the decrease in the company's assets resulting from the declaration of the dividend. However it must be emphasized that there is no direct link between the price and the dividend, this price movement is simply a result of market action.
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Record date - Shareholders who properly registered their ownership on or before the date of record will receive the dividend. Shareholders who are not registered as of this date will not receive the dividend. Registration in most countries is essentially automatic for shares purchased before the ex-dividend date. Payment date - The payment date is the day when the dividend checks will actually be mailed to the shareholders of a company or credited to brokerage accounts. Rights Issue A Rights issue is offered to existing shareholders; that gives them the right to purchase further shares in a given time period at a given price. Right issues are used by companies to raise additional capital. Action notify client. If client accepts offer, debit clients cash account and credit securities to clients securities account. Stock Split Partitioning the outstanding shares of a corporation into a larger number of shares, without affecting shareholders' equity or the total market value at the time of the split. For instance, if a stock valued at $100 splits 2-for-1, an investor who owns 100 shares would now own 200 shares valued at $50. Splits usually must be voted on by directors and approved by shareholders. Action - debit old securities from clients securities account and credit client with new securities. Exchange Offer An Exchange offer is an offer by an issuer of debt securities to exchange new securities with less onerous provisions for currently outstanding securities. Companies often make exchange offers in an attempt to avoid bankruptcy. Action notify client. If client accepts, debit old securities from clients securities account and credit client with new securities. Merger A merger occurs when two corporations join together into one, with one corporation surviving and the other corporation disappearing. The assets and liabilities of the disappearing entity are absorbed into the surviving entity. Action clients securities account is debited security of acquired company and credited security of acquiring company. Reverse Split A Reverse split is a procedure whereby a corporation reduces the number of outstanding shares. The total market value of the shares remains the same after the reverse split; however, a share is worth more. A company, for example, executes a 1 for 2 split. An investor owning 1000 shares will deliver them to the issuer and they will receive half as many new shares--but the shares will have double the value of the original shares. Action - debit old securities from clients securities account and credit client with new securities.
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Bonus Issue A Bonus Issue is the issue of new shares to an existing shareholder, but at no extra cost. A bonus issue is a means for the company to distribute historic retained profits to shareholders. Action credit clients securities account with new securities. Name Changes The renaming of a corporate entity. The result is the re-issuance of the corporations security in the new name and stock ticker symbol. Action the client is debited the old security and is credited with the new security in the same amount. This transaction is important as the old security sticker symbol does not trade on the market after the name change.
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Financial Training Manual Chapter 7 - Portfolio Management
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Portfolio management is the act of managing a portfolio of cash and securities (stock, bonds, derivatives, etc.) on behalf of a client. As opposed to a wealth manager (whos primary responsibility is to advise clients on investment decisions), a brokers primary responsibility is to carry out the clients orders and to insure that all the backend debiting/crediting occurs on each of the clients cash and securities accounts. For a broker, portfolio management is the management of the actual cash and securities in the clients account. He also must insure that cash and securities held by the client are not abused. As an example, if a client sells a security, the cash from the sale can only be used once (as opposed to falsely selling the same security multiple times and using the cash before the three day settlement period of the reveals the error.)
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Financial Training Manual Chapter 8 - Front Office Operations Equity derivatives
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Stock options - A contract giving its holder the right to purchase or sell the underlying security before a certain point in time for a specified amount of money as outlined by the contract. Call option - A contract that gives the holder the right to buy a specified number of shares of a particular stock at a predetermined price--called the "strike price"-on or before the option's expiration date. For this right, the holder (buyer) pays the writer (seller) a premium. The holder profits from the contract if the stock's price rises. If the holder decides to exercise the option (as opposed to selling it) the writer of the option must give up ownership of the security. Action Buy the option - at the purchase point of a call option, the client is debited cash and credited with the correct number of options contracts. If the option is executed, the client is further debited cash (per the rate in the contract) and is credited with securities. If the option is allowed to lapse (expire), no further action is taken on the clients account. Sell the option at the selling point of a call option, the client is credited cash and debited the option contracts. If the option is executed, the client is further credited with cash (from the stock sale to the owner of the call option) and debited the amount of shares (in the contract) from his securities account. If the option is allowed to lapse (expire), no further action is taken on the clients account. Put option - A contract that gives the holder the right to sell a specified number of shares (usually 100) of a particular stock at a predetermined price--called the "strike price"--on or before the option's expiration date. For this right, the holder (buyer) pays the writer (seller) a premium. The holder profits from the contract if the stock's price drops. Action Buy the option - at the purchase point of a put option, the client is debited cash and credited with the correct number of options contracts. If the option is executed, the client is credited cash (per the rate in the contract) and is debited with securities from his securities account. If the option is allowed to lapse (expire), no further action is taken on the clients account. Sell the option at the selling point of a call option, the client is credited cash and debited the option contracts. If the option is executed, the client is debited cash (from the stock purchase from the owner of the put option) and credited the amount of shares (in the contract) from his securities account. If the option is allowed to lapse (expire), no further action is taken on the clients account. Fixed Income derivatives Interest rate swaps An interest rate derivative in which one party exchanges a stream of interest for another stream. Interest rate swaps can be fixed-to-floating, fixed-to-fixed or floating-to-floating rate swaps. Interest rate swaps are often used
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by companies to re-allocate their exposure to interest-rate fluctuations, typically by exchanging fixed-rate obligations for floating rate obligations. Action Client is debited one monthly payment and credited another. For example, a client has swapped a fixed rate of 6.00% for a floating rate on $1,000,000. Every month, the client is debited $5,000 and credited with the floating rate for that month multiplied by $1,000,000. Asset backed securities - a type of bond or note that is based on pools of assets, or collateralized by the cash flows from a specified pool of underlying assets. Assets are pooled to make otherwise minor and uneconomical investments worthwhile, while also reducing risk by diversifying the underlying assets. The securitization makes these assets available for investment to a broader set of investors. These asset pools can be made of any type of receivable from the common, like credit card payments, auto loans, and mortgages, or esoteric cash flows such as aircraft leases, royalty payments and movie revenue. Typically, the securitized assets might be highly illiquid and private in nature. Action as an investor in the security, the client is initially debited the principal amount from his account and credited with the physical security. He is then credited with the monthly interest payment to his cash account. If no credit events occur on the security (i.e., bankruptcy default or prepayment) during the time period, the client is credited with the full principal at expiry. If a credit event does occur to the security, the client is credited with a pro-rated portion of whatever cash remains. Forwards A Forwards contract is a financial contract which requires a seller to agree to deliver a specified cash commodity to a buyer sometime in the future. All terms of the contract are customized, in contrast to futures contracts whose terms are standardized. Forward contracts are not traded on exchanges. Action Seller the seller of a forwards contract is credited with cash at the time of the sale. The contract must also be drafted (as it is unique) and stored in the clients information management. At the expiry date, he is debited with the contracted amount of securities (or commodities, et al.) Buyer the buyer of a forwards contract is debited cash from his account at the time of the sale. The contract must also be drafted (as it is unique) and stored in the clients information management. At the expiry date, he is credited with the contracted amount of securities (or commodities, et al.) Futures A futures contract is a form of forward contract, a contract to buy or sell an asset of any kind at a pre-agreed future point in time that has been standardized for a wide range of uses. It is traded on a futures exchange. Futures may also differ from forwards in terms of margin and delivery requirements. Action Seller the seller of a futures contract is credited with cash at the time of the sale. At the expiry date, he is debited with the contracted amount of securities (or commodities, et al.)
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Buyer the buyer of a futures contract is debited cash from his account at the time of the sale. At the expiry date, he is credited with the contracted amount of securities (or commodities, et al.)
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Financial Training Manual GLOSSARY
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ACCRUED INTEREST: The interest that has accumulated on a bond since the last interest payment up to, but not including, the settlement date. There are two methods for calculating accrued interest: 1. 360-day year method, used for corporate and municipal bonds 2. 365-day year method, used for government bonds Accrued interest is added to the contract price of a bond transaction. Essentially, accrued interest has been earned since the last coupon payment - but since the bond hasn't expired or the next payment is not yet due, the owner of the bond hasn't officially received the money. If he or she sells the bond, accrued interest is added to the sale price. AGENT: 1. An individual or firm that places securities transactions for clients. 2. A person licensed by a state to sell insurance. 3. A securities salesperson who represents a broker-dealer or issuer when selling or trying to sell securities to the investing public. Essentially, this is the person who makes a transaction on behalf of his or her employer or client. ALL OR NONE: A condition used on a buy or sell order to instruct the broker to fill the order completely or not at all. For example, if you send a AON order to your broker requesting 200 shares at $15, the broker will not fill the order unless s/he can get you the 200 shares at $15. This prevents you from having orders half filled before they expire. AMEX: The third-largest stock exchange by trading volume in the United States. The AMEX is located in New York City and handles about 10% of all securities traded in the U.S. The AMEX has now merged with the NASDAQ. It was known as the "curb exchange" until 1921. It used to be a strong competitor to the New York Stock Exchange, but that role has since been filled by the Nasdaq. Today, almost all trading on the AMEX is in small-cap stocks, exchange-traded funds and derivatives. AT THE CLOSE ORDER: An order specifying that a trade is to be executed at the close of the market, or as near to the closing price as possible. It's essentially a market order that doesn't get entered until the last minute (or thereabouts) of trading. With this type of order you are not necessarily guaranteed the closing price but usually something very similar.
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AT THE OPENING ORDER: An order specifying that a trade is to be executed at the opening of the market, otherwise it's canceled. With this type of order you are not necessarily guaranteed the opening price. AUTOMATED ORDER ENTRY SYSTEM: Electronic system which facilitates small order execution by routing such orders directly to the appropriate specialist on the exchange floor, rather than going through a floor broker. BEAR SPREAD: 1. An option strategy seeking maximum profit when the price of the underlying security declines. The strategy involves the simultaneous purchase and sale of options; puts or calls can be used. A higher strike price is purchased and a lower strike price is sold. The options should have the same expiration date. 2. A trading strategy used by futures traders who intend to profit from the decline in commodity prices while limiting potentially damaging losses. You make money if the underlying goes down and lose if the underlying rises in price. A bear spread is created through the simultaneous purchase and sale of two of the same or closely related futures contracts. This is accomplished in the agricultural commodity markets by selling a future and offsetting it by purchasing a similar contract with an extended delivery date. BID AND ASKED: The bid is the price at which a market maker is willing to buy a security. The market maker will also display an ask price, or the amount and price at which it is willing to sell. An example of a bid in the market would be $23.53 x 1,000, which means that an investor is willing to purchase 1,000 shares at the price of $23.53. If a seller in the market is willing to sell that amount for that price, then the transaction is completed. Market makers are vital to the efficiency and liquidity of the marketplace. By quoting both bid and ask prices on the market, they always allow investors to buy or sell a security if they need to. BULL SPREAD: An option strategy in which maximum profit is attained if the underlying security rises in price. Either calls or puts can be used. The lower strike price is purchased and the higher strike price is sold. The options have the same expiration date. You make a lot of money if the stock rises. You lose it all if it doesn't. It's one of those higher risk maneuvers that can cause a lot of anxiety. CALENDAR SPREAD: An options or futures spread established by simultaneously entering a long and short position on the same underlying asset but with different delivery months. Sometimes referred to as an interdelivery, intramarket, time or horizontal spread. An example of a calendar spread would be going long on a crude oil futures
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contract with delivery next month and going short on a crude oil futures contract whose delivery is in six months. CALL 1. The period of time between the opening and closing of some future markets wherein the prices are established through an auction process. 2. An option contract giving the owner the right (but not the obligation) to buy a specified amount of an underlying security at a specified price within a specified time. 3. In some exchanges, the call period is an important time in which to match and execute a large number of orders before opening and closing. 4. A call becomes more valuable as the price of the underlying asset (stock) appreciates. COLLATERALIZED MORTAGE OBLIGATION: A type of mortgage-backed security that creates separate pools of pass-through rates for different classes of bondholders with varying maturities, called tranches. The repayments from the pool of pass-through securities are used to retire the bonds in the order specified by the bonds' prospectus. Here is an example how a very simple CMO works: The investors in the CMO are divided up into three classes. They are called either class A, B or C investors. Each class differs in the order they receive principal payments, but receives interest payments as long as it is not completely paid off. Class A investors are paid out first with prepayments and repayments until they are paid off. Then class B investors are paid off, followed by class C investors. In a situation like this, class A investors bear most of the prepayment risk, while class C investors bear the least. CMOs usually offer low returns because they are very low risk and are sometimes backed by government securities. COMBINATION: When an investor holds a position in both call and put options on the same asset. There are various types of combination spreads, including straddles and strangles. COMMISSION: A service charge assessed by a broker or investment advisor in return for providing investment advice and/or handling the purchase or sale of a security. Most major, full-service brokerages derive most of their profits from charging commissions on client transactions. Commissions vary widely from brokerage to brokerage. The brokerage with the lowest commissions is not necessarily the best one. Discount brokerages offer no advice, which can prove to be troublesome for many rookie investors. On the other hand, full-service brokerages offer a more personalized service, but commissions are much higher. However, there is the potential for a conflict of interest to develop between brokerages that charge commissions and their clients. Because commission compensated brokers will not get paid very much if their clients do not conduct
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many transactions, unethical brokers may encourage clients to conduct more trades than necessary. COMMON STOCK: A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings. There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders' meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated. Also known as "shares" or "equity". A holder of stock (a shareholder) has a claim to a part of the corporation's assets and earnings. In other words, a shareholder is an owner of a company. Ownership is determined by the number of shares a person owns relative to the number of outstanding shares. For example, if a company has 1,000 shares of stock outstanding and one person owns 100 shares, that person would own and have claim to 10% of the company's assets. Stocks are the foundation of nearly every portfolio. Historically, they have outperformed most other investments over the long run. CREDIT BALANCE In a margin account, the amount of funds deposited in the customer's account following the successful execution of a short sale order. The credit balance amount includes both the proceeds of the short sale itself and the specified margin amount the customer is required to deposit under Regulation T. In the case of a short sale, an investor essentially borrows equity shares from his or her brokerage and then sells the shares on the open market, hoping to buy them back off the open market for a lower price at a later date and then return them to the brokerage, pocketing the excess cash left over. When the shares are first short sold, the investor receives the cash amount of the sale in his or her margin account. This amount, plus the specified margin amount which must be deposited by the investor under Reg T, comprises the credit balance. It must be maintained in the investor's margin account as a form of assurance that the shares can be repurchased from the market and returned to the brokerage house. CREDIT SPREAD: 1. The spread between Treasury securities and non-Treasury securities that is identical in all respects except for quality rating. 2. An options strategy where a high premium option is sold and a low premium option is bought on the same underlying security. 3. For instance, the difference between yields on treasuries and those on single A-rated industrial bonds. A company must offer a higher return on their bonds because their credit is worse than the government's. 4. Can also be called "credit spread option" or "credit risk option".
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DAY ORDER: Any order to buy or sell a security that automatically expires if not executed on the day the order is placed. A day order will not be executed if the limit or stop order prices were not met during the day. A way to increase the life of an order is to order securities on a 'good 'till cancelled' basis, where, as the name implies, the trade will not expire until it is cancelled or until it reaches a maximum time limit set by the brokerage. DEBIT BALANCE: In a margin account, money owed by the customer to the broker for funds advanced to purchase securities. The debit balance is the amount of funds the customer must put into his or her margin account, following the successful execution of a security purchase order, in order to properly settle the transaction. When buying on margin, investors borrow funds from their brokerage and then combine those funds with their own to purchase a greater number of shares than they would have been able to purchase with their own funds. The debit amount recorded by the brokerage in an investor's account represents the cash cost of the transaction to the investor. DEBIT SPREAD: Two options with different market prices that an investor trades on the same underlying security. The higher priced option is purchased and the lower premium option is sold - both at the same time. The higher the debit spread, the greater the initial cash outflow the investor will incur on the transaction. For example, assume that there is a investor holding a call option who sells it for $2.50. Immediately following this sale, the investor buys another call option on the same underlying security for $2.65. The debit spread is $0.15, which results in a loss of $15 ($0.15 * 100). Although there is an initial loss on the transaction, the investor is betting that there will be a significant change in the price of the underlying security, making the purchased option more valuable in the future. DELIVERY: The action by which an underlying commodity, security, cash value, or delivery instrument covering a contract is tendered and received by the contract holder. Delivery can occur in option, forward, or futures contracts. In most instances, the delivery of the actual underlying is rare--contracts are typically closed before settlement. DIVIDEND: Distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (i.e. dividends per share or DPS). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield. Dividends may be in the form of cash, stock or property. Most secure and stable companies offer dividends to their stockholders. Their share prices might not move much, but the dividend attempts to make up for this. In the U.S., dividends face double taxation - the amount comes from after-tax
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income the company generated and the recipients pay taxes on them. As of 2003, cash dividends are taxed at a maximum rate of 15% as long as the stock has been held for at least 60 out of the 120 days beginning 60 days prior to the ex-dividend date. If you have held the stock for a period of less than this the dividend will be taxed at your regular income level. High-growth companies rarely offer dividends because all their profits are reinvested to help sustain higher-than-average growth. DO NOT REDUCE (DNR): A trade type used on an buy or sell order. It tells the broker not to decrease the limit price on buy-limit and sell-stop orders on the record date of a cash dividend. When a stock goes ex-dividend the price is usually reduced by the amount of the dividend. ECN: An electronic system that attempts to eliminate the role of a third party in the execution of orders entered by an exchange market maker or an over-thecounter market maker, and permits such orders to be entirely or partly executed. An ECN connects major brokerages and individual traders so that they can trade directly between themselves without having to go through a middleman. EX-DIVIDEND DATE: The date on or after which a security is traded without a previously declared dividend or distribution. After the ex-date, a stock is said to trade ex-dividend. This is the date on which the seller, and not the buyer, of a stock will be entitled to a recently announced dividend. The ex-date is usually two business days before the record date. It is indicated in newspaper listings with an x. EXERCISE PRICE: The price at which the underlying security can be purchased (call option) or sold (put option). The exercise price is determined at the time the option contract is formed. Also known as the "strike price, the exercise price is the key to profiting from options. A difference between the fixed exercise price and the market price at the time the option is exercised is what gives it value. Generally, the greater the difference between the exercise and market price at the time an option contract is written, the higher the premium required to purchase the option. EXPIRATION: The day on which an options or futures contract is no longer valid and, therefore, ceases to exist. The expiration date for all listed stock options in the U.S. is the third Friday of the expiration month (except when it falls on a holiday, in which case it is on Thursday). EX-RIGHTS: Shares of stock that are trading but no longer have rights attached because they have either; expired, been transferred to another investor or been exercised. The rights originally assigned to the stockholder are, for whatever reason, no longer
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valid or no longer applicable to the stock. Ex-rights shares are worth less than shares which are not yet ex-rights - the ex-rights shares do not give a shareholder access to a rights offering. Renounce-able rights may trade separately, allowing shareholders to choose to sell their rights rather than exercise them 401(K) PLAN: A qualified plan established by employers to which eligible employees may make salary-deferral (salary-reduction) contributions on a post- and/or pre-tax basis. Employers may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis. Caps placed by the plan and/or IRS regulations usually limit the percentage of salary-deferral contributions. There are also restrictions on how and when employees can withdraw these assets, and penalties may apply if the amount is withdrawn while an employee is under the retirement age as defined by the plan. Plans that allow participants to direct their own investments provide a core group of investment products from which participants may choose. Otherwise, professionals hired by the employer direct and manage the employees' investments. FIFO: An asset-management and valuation method in which the assets produced or acquired first are sold, used or disposed of first. FIFO may be used by a individual or a corporation. For taxation purposes, FIFO assumes that the assets that are remaining in inventory are matched to the assets that are most recently purchased or produced. Because of this assumption, there are a number of tax minimization strategies associated with using the FIFO asset-management and valuation method. FOK: An order to fill a transaction immediately and completely or not at all. This type of order is usually for a large quantity of stock, and must be filled in its entirety or canceled (killed). Examples include market and limit orders requiring immediate executing. In reality, the fill-or-kill type of trade does not occur very often. FOURTH MARKET: The trading of exchange-listed securities between institutions on a private overthe-counter computer network, rather than over a recognized exchange such as the New York Stock Exchange (NYSE) or NASDAQ. Trades between institutions will often be made in large blocks and without a broker, allowing the institutions to avoid brokerage fees. For example, when a mutual fund and a pension fund enter into a large block trade with each other, this would generally occur in the fourth market and usually over an electronic communication network. By executing the transaction this way, both parties avoid brokerage and exchange transaction fees. They also avoid the possibility of distorting the market price or the volume traded on an exchange.
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FUTURES: A Futures contract is a financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets. Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of corn by going long or short using futures. The primary difference between options and futures is that options give the holder the right to buy or sell the underlying asset at expiration, while the holder of a futures contract is obligated to fulfill the terms of his/her contract. In real life, the actual delivery rate of the underlying goods specified in futures contracts is very low. This is a result of the fact that the hedging or speculating benefits of the contracts can be had largely without actually holding the contract until expiry and delivering the good(s). For example, if you were long in a futures contract, you could go short the same type of contract to offset your position. This serves to exit your position; much like selling a stock in the equity markets would close a trade. GOOD DELIVERY: The status of a security traded on an exchange when it meets a set of requirements for being in proper form for transfer of title to the buyer. This term, when applied to a security, represents the security certificate's readiness to be transferred to the purchaser "on good delivery". If this readiness is not achieved, the transaction cannot be settled. For example, if a certificate has a share transfer restriction on it, the certificate would not be deemed good delivery. GTC: An order to buy or sell a security at a set price that is active until the investor decides to cancel it or the trade is executed. If an order does not have a good-tillcanceled instruction then the order will expire at the end of the trading day the order was placed. In most cases GTC orders are canceled by brokerage firms after 30-90 days. These type of orders are traditionally placed at price points away from the price of the stock at the time the order is placed. For example if a stock you held was currently $40 but you believe it will go to $50 at which point you would sell then you would use a GTC order. Once the GTC order to sell is placed if the price of the stock reaches $50 at any point over the next few months your shares will be sold. HEDGING: The use of two nearly opposite-direction securities, instruments, or futures contracts as means of attempting to reduce risk. Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security,
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such as a contract. An example of a hedge would be if you owned a stock, then sold a futures contract stating that you will sell your stock at a set price, therefore avoiding market fluctuations. Investors use this strategy when they are unsure of what the market will do. A perfect hedge reduces your risk to nothing (except for the cost of the hedge). IOC: An order requiring that all or part of the order be executed immediately after it has been brought to the market. Any portions not executed immediately are automatically cancelled. This is used for large orders where filling quickly can be difficult INDEX: An index is essentially an imaginary portfolio of securities representing a particular market or a portion of it. Each index has its own calculation methodology and is usually expressed in terms of a change from a base value. Thus, the percentage change is more important than the actual numeric value. For example, knowing that a stock exchange is at, say, 5,000 doesn't tell you much. However, knowing that the index has risen 30% over the last year to 5,000 gives a much better demonstration of performance. The plural of index can be either "indexes" or "indices. The Standard & Poor's 500 is one of the world's best known indexes, and is the most commonly used benchmark for the stock market. Technically, you can't actually invest in an index. Rather, you invest in a security such as an index fund or exchange-traded fund that attempts to track an index as closely as possible. INDEX FUND: A portfolio of investments that is weighted the same as a stock-exchange index in order to mirror its performance. This process is also referred to as "indexing. Investing in an index fund is a form of passive investing. The primary advantage to such a strategy is the lower management expense ratio on an index fund. Also, a majority of mutual funds fail to beat broad indexes such as the S&P 500. INDEX OPTION: A call or put option on a financial index. Investors trading index options are essentially betting on the overall movement of the stock market as represented by a basket of stocks. Options on the S&P 500 are some of the most actively traded options in the world. INTERMARKET TRADING SYSTEM (ITS): An electronic communications network now linking the trading floors of registered exchanges to foster competition among them in stocks listed on either the NYSE or AMEX and one or more regional exchanges. Through ITS. Any broker or market can reach out to other participants for an execution whenever the nationwide quote shows a better price available.
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LIFO: An asset-management and valuation method that assumes that assets produced or acquired last are the ones that are used, sold or disposed of first. LIFO assumes that an entity sells, uses or disposes of its newest inventory first. If an asset is sold for less than it is acquired for, then the difference is considered a capital loss. If an asset is sold for more than it is acquired for, the difference is considered a capital gain. Using the LIFO method to evaluate and manage inventory can be tax advantageous, but it may also increase tax liability. LIMIT ORDER: An order placed with a brokerage to buy or sell a set number of shares at a specified price or better. Limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled.Limit orders typically cost more than market orders. Despite this, limit orders are beneficial because when the trade goes through, investors get the specified purchase or sell price. Limit orders are especially useful on a low-volume or highly volatile stock LONG: The buying of a security such as a stock, commodity or currency, with the expectation that the asset will rise in value. In the context of options, the buying of an options contract. Opposite of "short (or short position)". For example, an owner of shares in McDonald's Corp. is said to be "long McDonald's" or "has a long position in McDonald's". For example, buying a call (or put) options contract from an options writer entitles you the right, not the obligation to buy (or sell) a specific commodity or asset for a specified amount at a specified date. MARGIN CALL: A broker's demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. This is sometimes called a "fed call" or "maintenance call. You would receive a margin call from a broker if one or more of the securities you had bought (with borrowed money) decreased in value past a certain point. You would be forced either to deposit more money in the account or to sell off some of your assets. MARKET ORDER: An order to buy or sell a stock immediately at the best available current price. A market order is sometimes referred to as an "unrestricted order".A market order guarantees execution, and it often has low commissions due to the minimal work brokers need to do. Be wary of using market orders on stocks with a low average daily volume: in such market conditions the ask price can be a lot higher than the current market price (resulting in a large spread). In other words, you may end up paying a whole lot more than you originally anticipated! It is much
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safer to use a market order on high-volume stocks, such as Microsoft or WalMart. MARRIED PUT: An option strategy whereby an investor, holding a long position in stock, purchases a put on the same stock to protect against a depreciation in the stock's price.
Potential gains or losses from a married put strategy are created from the net effect of a long position in both the put and its underlying stock. This strategy establishes a floor, allowing unlimited profits while limiting the potential loss. Should the stock price decline below the strike price before expiration of the option, the investor would exercise the put option and sell his or her stock at the strike price. Should the stock price increase above the strike price, the option would not be exercised and the investor could sell the stock at the higher price and recognize a profit if the stock price is above the overall cost of the position. In essence, this is like purchasing insurance against your stock MORTGAGAE-BACK SECURITIES: A type of asset-backed security that is secured by a mortgage, or a collection of mortgages. These securities must also be grouped in one of the top two ratings as determined by a accredited credit rating agency, and usually pay periodic payments that are similar to coupon payments. Furthermore, the mortgage must have originated from a regulated and authorized financial institution. Also known as a mortgage related security, or a mortgage pass-through.When you invest in a mortgage-backed security you are in lending money to a homebuyer or business. An MBS is a way for a smaller regional bank to lend mortgages to its customers without having to worry if the customers have the assets to cover the loan. Instead, the bank acts as a middleman between the home-buyer and the investment markets. This type of security is also commonly used to redirect the interest and principle payments from the pool of mortgages to shareholders. These payments can be further broken down into different classes of securities, depending on the assumed risk of different mortgages as they are classified under the MBS. NASD: A self-regulatory organization of the securities industry responsible for the operation and regulation of the Nasdaq stock market and over-the-counter
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markets. It also administrates exams for investment professionals, such as the Series 7 exam. The NASD watches over the Nasdaq to make sure the market operates correctly. NASDAQ: NASDAQ (acronym National Association of Securities Dealers Automated Quotations system) is an American stock market. It was founded in 1971 by the National Association of Securities Dealers (NASD), who divested it in a series of sales in 2000 and 2001. It is owned and operated by The Nasdaq Stock Market, Inc., the stock of which was listed on its own stock exchange in 2002. NASDAQ is the largest electronic screen-based equity securities market in the United States. With approximately 3,200 companies, it lists more companies and on average trades more shares per day than any other U.S. market NASDAQ allows multiple market participants to trade through its Electronic Communication Networks (ECNs) structure, increasing competition. The Small Order Execution System (SOES) is another NASDAQ feature, introduced in 1987, to ensure that in 'turbulent' market conditions small market orders are not forgotten but are automatically processed. With approximately 3,200 companies, it lists more companies and, on average, its systems trade more shares per day than any other stock exchange in the world. NASDAQ will follow the New York Stock Exchange in halting domestic trading in the event of a sharp and sudden decline of the Dow Jones Industrial Average. NATIONAL MARKET SYSTEM (NMS) : A system with two main functions: 1. To facilitate trading of OTC stocks whose size, profitability, and trading activity meet specific criteria. 2. To post prices for securities on the NYSE and other regional exchanges simultaneously, allowing investors to obtain the best price. The National Market System is sponsored by both the NASD and the Nasdaq. Compared to other OTC stocks, OTC stocks trading under the NMS system have a more comprehensive listing within newspapers. NYSE: A corporation, operated by a board of directors, responsible for listing securities, setting policies and supervising the stock exchange and its member activities. The NYSE also oversees the transfer of members' seats on the Exchange, judging whether a potential applicant is qualified to be a specialist. The NYSE uses floor traders (people) to make trades, whereas the Nasdaq and many other exchanges are computer driven. OVER THE COUNTER (O-T-C): A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network In general, the reason for which a stock is traded over-the-counter is usually because the company is
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small, making it unable to meet exchange listing requirements. Also known as "unlisted stock", these securities are traded by broker-dealers who negotiate directly with one another over computer networks and by phone. Although Nasdaq operates as a dealer network, Nasdaq stocks are generally not classified as OTC because the Nasdaq is considered a stock exchange. As such, OTC stocks are generally unlisted stocks which trade on the Over the Counter Bulletin Board (OTCBB) or on the pink sheets. Be very wary of some OTC stocks, however; the OTCBB stocks are either penny stocks or are offered by companies with bad credit records. Instruments such as bonds do not trade on a formal exchange and are, therefore, also considered OTC securities. Most debt instruments are traded by investment banks making markets for specific issues. If an investor wants to buy or sell a bond, he or she must call the bank that makes the market in that bond and asks for quotes. PRICE SPREAD: 1. The difference between the bid and the ask price of a security or asset. 2. An options position established by purchasing one option and selling another option of the same class but of a different series. 3. The spread for an asset is influenced by a number of factors: a) Supply or "float" (the total number of shares outstanding that are available to trade) b) Demand or interest in a stock c) Total trading activity of the stock 4. For a stock option, the spread would be the difference between the strike price and the market value. PUT: A put is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time. The buyer of a put option estimates that the underlying asset will drop below the exercise price before the expiration date. The possible payoff for a holder of a put option contract is illustrated by the following diagram:
When an individual purchases a put, they expect the underlying asset will decline in price. They would then profit by either selling the put options at a profit, or by
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exercising the option. If an individual writes a put contract, they are estimating the stock will not decline below the exercise price, and will not increase significantly beyond the exercise price. Consider if an investor purchased one put option contract for 100 shares of ABC Co. for $1, or $100 ($1*100). The exercise price of the shares is $10 and the current ABC share price is $12. This contract has given the investor the right, but not the obligation, to sell shares of ABC at $10. If ABC shares drop to $8, the investor's put option is in-the-money and he can close his option position by selling his contract on the open market. On the other hand, he can purchase 100 shares of ABC at the existing market price of $8; then exercise his contract to sell the shares for $10. Excluding commissions, his total profit for this position would be $100 [100*($10 - $8 - $1)]. If the investor already owned 100 shares of ABC, this is called a "married put" position and serves as a hedge against a decline in share price. PUT LONG: An options strategy in which a put option is purchased as a speculative play on a downturn in the price of the underlying equity or index. In a long put trade, a put option is purchased on the open exchange with the hope that the underling stock falls in price, thereby increasing the value of the options, which are "held long" in the portfolio. The options can either be sold prior to expiration (for a profit or loss) or held to expiration, at which time the investor must purchase the stock at market prices, then sell the stock at the stated exercise price.
The long put strategy represents an alternative to an investor simply selling a stock short, then buying it back at a profit if the stock falls in price. Options can be favored over shorting due to increased liquidity (especially for stocks with smaller floats), increased leverage and a capped maximum loss (the investor cannot lose more than premiums paid). PUT OPTION: An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy shares. A put becomes more valuable as the price of the underlying stock depreciates relative to the strike price. For example, if you have one Mar 07 Taser 10 put, you have the right to sell 100 shares of Taser at $10 until March
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2007 (usually the third Friday of the month). If shares of Taser fall to $5 and you exercise the option, you can purchase 100 shares of Taser for $5 in the market and sell the shares to the option's writer for $10 each, which means you make $500 (100 x $10-$5) on the put option. QUOTE: The last price at which a security or commodity traded, meaning the most recent price on which a buyer and seller agreed and at which some amount of the asset was transacted. The bid or ask quotes are the most current prices and quantities at which the shares can be bought or sold. The bid quote shows the price and quantity at which a current buyer is willing to purchase the shares, while the ask shows what a current participant is willing to sell the shares for. REVERSE SPLIT: A reduction in the number of a corporation's shares outstanding that increases the par value of its stock or its earnings per share. The market value of the total number of shares (market capitalization) remains the same. For example, a 1-for2 reverse split means you get half as many shares, but at twice the price. It's usually a bad sign if a company is forced to reverse split - firms do it to make their stock look more valuable when, in fact, nothing has changed. A company may also do a reverse split to avoid being de-listed. ROUND LOT: The normal unit of trading for a security, which is generally 100 shares of stock. Anything less than 100 shares is considered an odd lot. SHORT INTERST: The total number of shares of a security that have been sold short by customers and securities firms. Short interest is typically expressed as a percentage. For example, 3% short interest means that 3% of the outstanding shares are held short. SHORT POSITION: The sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value. In the context of options, it is the sale (also known as "writing") of an options contract. Opposite of "long (or long position)". 1. For example, an investor who borrows shares of stock from a broker and sells them on the open market is said to have a short position in the stock. The investor must eventually return the borrowed stock by buying it back from the open market. If the stock falls in price, the investor buys it for less than he or she sold it, thus making a profit. 2. For example, selling a call (or put) options contract to a buyer entitles the buyer the right, not the obligation to buy from (or sell
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to) you a specific commodity or asset for a specified amount at a specified date. SHORT SALE: A market transaction in which an investor sells borrowed securities in anticipation of a price decline and is required to return an equal amount of shares at some point in the future. The payoff to selling short is the opposite of a long position. A short seller will make money if the stock goes down in price, while a long position makes money when the stock goes up. The profit that the investor receives is equal to the value of the sold borrowed shares less the cost of repurchasing the borrowed shares. Suppose 1,000 shares are short sold by an investor at $25 apiece and $25,000 is then put into that investor's account. Let's say the shares fall to $20 and the investor closes out the position. To close out the position, the investor will need to purchase 1,000 shares at $20 each ($20,000). The investor captures the difference between the amount that he or she receives from the short sale and the amount that was paid to close the position, or $5,000. There are also margin rule requirements for a short sale in which 150% of the value of the shares shorted needs to be initially held in the account. Therefore, if the value is $25,000, the initial margin requirement is $37,500 (which includes the $25,000 of proceeds from the short sale). This prevents the proceeds from the sale from being used to purchase other shares before the borrowed shares are returned. Short selling is an advanced trading strategy with many unique risks and pitfalls. Novice investors are advised to avoid short sales because this strategy includes unlimited losses. A share price can only fall to zero, but there is no limit to the amount it can rise. SPECIALIST A Specialist is a Member of a stock exchange who maintains a fair and orderly market in one or more securities. SPREAD: The difference between the bid and the ask price of a security or asset. An options position established by purchasing one option and selling another option of the same class but of a different series. The spread for an asset is influenced by a number of factors: a) Supply or "float" (the total number of shares outstanding that are available to trade) b) Demand or interest in a stock c) Total trading activity of the stock For a stock option, the spread would be the difference between the strike price and the market value. STOCK DIVIDEND: A dividend payment made in the form of additional shares, rather than a cash payout. Also known as a "scrip dividend", companies may decide to distribute
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stock to shareholders of record if the company's availability of liquid cash is in short supply. These distributions are generally acknowledged in the form of fractions paid per existing share. An example would be a company issuing a stock dividend of 0.05 shares for each single share held. STOCK SPLIT: A type of corporate action where a company's existing shares are divided into multiple shares. Although the amount of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because no real value has been added as a result of the split. In the U.K., a stock split is referred to as a "scrip issue", "bonus issue", "capitalization issue" or "free issue". For example, in a 2-for-1 split, each stockholder receives an additional share for each share he or she holds. One reason as to why stock splits are performed is that a company's share price has grown so high that to many investors the shares are too expensive to buy in round lots. For example, if a XYZ Corp's shares were worth $1,000 each, investors would need to purchase $100,000 in order to own 100 shares (whereas, if each share was worth $10 each, investors only need to pay $1,000 to own 100 shares.) STOP-LIMIT ORDER: An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will be executed at a specified price (or better) after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy (or sell) at the limit price or better. The primary benefit of a stop-limit order is that the trader has precise control over where the order should be filled. The downside, as with all limit orders, is that the trade is not guaranteed to be executed if the stock/commodity does not reach the limit price. A stop order is an order that becomes executable once a set price has been reached and is then filled at the current market price. A limit order is one that is at a certain price or better. By combining the two orders, the investor has much greater precision in executing the trade. Because a stop order is filled at the market price after the stop price has been hit, it's possible that you could get a really bad fill in fast-moving markets. Also, some brokers don't accept stop-limits for all securities, specifically over-the-counter stocks. For example, let's assume that ABC Inc. is trading at $40 and an investor has put in a stop-limit order to buy with the stop price at $45 and the limit price at $46. If the price of ABC Inc. moves above $45 stop price, the order is activated and turns into a limit order. As long as the order can be filled under $46 (the limit price); then the trade will be filled. If the stock gaps up above $46, the order will not be filled. STOP ORDER: An order to buy or sell a security when its price surpasses a particular point, thus ensuring a greater probability of achieving a predetermined entry or exit price,
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limiting the investor's loss or locking in his or her profit. Once the price surpasses the predefined entry/exit point, the stop order becomes a market order. Also referred to as a "stop" and/or "stop-loss order". Investors commonly use a stop order before leaving for holidays or entering a situation where they are unable to monitor their portfolio for an extended period. Stops are not a 100% guarantee of getting the desired entry/exit points. For instance, if a stock gaps down then the trader's stop order will be triggered (or filled) at a price significantly lower than expected. Traders who use technical analysis will place stop orders below major moving averages, trend lines, swing highs, swing lows or other key support or resistance levels. STRADDLE: An options strategy with which the investor holds a position in both a call and put with the same strike price and expiration date.
Straddles are a good strategy to pursue if an investor believes that a stock's price will move significantly, but is unsure as to which direction. The stock price must move significantly if the investor is to make a profit. As shown in the diagram above, should only a small movement in price occur in either direction, the investor will experience a loss. As a result, a straddle is extremely risky to perform. Additionally, on stocks that are expected to jump, the market tends to price options at a higher premium, which ultimately reduces the expected payoff should the stock move significantly. SWAPPING: Traditionally, the exchange of one security for another to change the maturity (bonds), quality of issues (stocks or bonds), or because investment objectives have changed. Recently, swaps have grown to include currency swaps and interest rate swaps. If firms in separate countries have comparative advantages on interest rates, then a swap could benefit both firms. For example, one firm may have a lower fixed interest rate, while another has access to a lower floating interest rate. These firms could swap to take advantage of the lower rates.
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THIRD MARKET: Trading by non exchange-member brokers/dealers and institutional investors of exchange-listed stocks. In other words, the third market involves exchange-listed securities that are being traded over-the-counter between brokers/dealers and large institutional investors. Before selling an exchange-listed security to a nonmember, a member firm must fill all limit orders on the specialist's book at the same price or higher. Typical institutional investors who take part in the third market include investment firms and pension plans. UNCOVERED aka NAKED OPTION: An option position where the buyer or seller has no underlying security position. Naked options are very risky. Profits are huge if the underlying asset moves in the direction desired by the investor. On the other hand, a writer of a naked option can lose big if the underlying asset moves in the opposite direction. UPTICK: A transaction occurring at a price above the previous transaction. In order for an uptick to occur, a transaction price must be followed by an increased transaction price. This term is commonly used in reference to stocks, but it can also be extended to commodities and other securities. For example, suppose stock ABC previously traded at $10. If its next trade occurred at a price above $10, ABC would be on an uptick. VERTICAL SPREAD aka PRICE SPREAD: An options trading strategy with which a trader makes a simultaneous purchase and sale of two options of the same type that have the same expiration dates but different strike prices. Profits are determined by the widening or narrowing of the difference between the option premiums on the two positions. WRITER: The seller of an option who collects the premium payment from the buyer. For example, a writer holds a short position on a call option. If the call option is exercised, then the writer has to sell the underlying stock at the strike price of the option. Conversely, if you are the writer of a put option, you are said to be long, and must purchase the underlying stock at the particular price. Being a writer is relatively risky - especially on a naked position. This technique should not be used by those who are new to option markets. YIELD BASED OPTIONS: A type of debt-instrument-based option that derives its value from the difference between the exercise price and the value of the yield of the underlying debt instrument. Yield-based options are settled in cash. A yield-based call buyer expects interest rates to go up, while a yield-based put buyer expects interest rates to go down. If the interest rate of the underlying debt security rises above the strike price of a yield-based call option plus the premium paid, the call holder is 'in the money'. Should the opposite occur, and the interest rate falls below the strike price less the premium paid for a yield-based put option, the put holder is in the money.
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ZERO-PLUS TICK aka UPTICK: A transaction at the same price as the preceding trade, but at a higher price than the last different trade (also known as a "zero uptick".) For example, when trades are executed at $10, $11, and $11, the last trade at $11 is a zero-plus tick. A short sale is only permitted on a zero plus tick or an uptick.
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Financial Training Manual

Pyxis Solutions Financial Training Manual Version 1.2

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Financial Training Manual

Chapter 1 - Introduction to Markets ............................................................... 3

Chapter 2 Brokerage Services ..................................................................... 8

Principal vs. Agent.............................................................................................................................. 11

Chapter 3 - Trading Introduction.................................................................. 12

Chapter 4 - Trade Processing........................................................................ 14

Chapter 5 - Securities Processing and Clearing............................................ 19

Chapter 6 - Corporate Actions ...................................................................... 23

Chapter 7 - Portfolio Management ............................................................... 27 Chapter 8 - Front Office Operations............................................................. 28

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Financial Training Manual Chapter 1 - Introduction to Markets

Financial Training Manual

Financial Training Manual

Financial Training Manual

Financial Training Manual

Pyxis Solutions LLC, Confidential

Financial Training Manual Chapter 2 Brokerage Services Prime Brokerage Services

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Financial Training Manual

Financial Training Manual

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Financial Training Manual Chapter 3 - Trading Introduction

Financial Training Manual

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Financial Training Manual

Financial Training Manual

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Financial Training Manual

Buy Stop-Limit Buy Stop Sell Limit

ORDERS ENTERED ABOVE THE MARKET

ORDERS ENTERED BELOW THE MARKET

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Financial Training Manual

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Financial Training Manual

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Financial Training Manual Clearing and Settlement

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Financial Training Manual

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Financial Training Manual Chapter 6 - Corporate Actions

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Financial Training Manual

Financial Training Manual

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Financial Training Manual Chapter 7 - Portfolio Management

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Financial Training Manual Chapter 8 - Front Office Operations Equity derivatives

Financial Training Manual

Financial Training Manual

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Financial Training Manual GLOSSARY

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Financial Training Manual