Chapter 2 Notes: Markets, Orders, and Margin Trading (Vocabulary)

Vocabulary flashcards covering key concepts from the lecture notes on markets, orders, and margin trading.

IPO

Initial Public Offering; primary market issue where securities are issued to the public.

Secondary market

Market where securities trade after issuance (post-IPO).

Market maker

Dealer who buys and sells securities for their own account to provide liquidity.

Designated Market Maker (DMM)

Specialized market maker on an exchange who supervises trading to ensure smooth trading and may trade for own account in volatile conditions.

NYSE Big Board

New York Stock Exchange; major U.S. stock exchange (historically “Big Board,” now merged with Euronext).

Listing requirements

Exchange criteria a company must meet to have its stock listed; failure can lead to delisting.

OTC

Over-the-counter market for securities not listed on an organized exchange.

NASDAQ

A major stock market/quotation system for trading many securities via electronic networks.

Third Market

OTC market for securities listed on an exchange; online trading blurs line between exchanges and OTC.

ECNs

Electronic Communication Networks; allow market and limit orders to be posted and matched electronically; include networks like BATS.

BATS

One of the leading ECNs; provides electronic trading and order crossing.

Round lot

Trading in multiples of 100 shares.

Odd lot

Trading in less than 100 shares.

Bid

Price at which a securities dealer is willing to buy a stock.

Ask

Price at which a securities dealer is willing to sell a stock.

Spread

Difference between the bid and ask prices; a source of profit for the dealer.

Equilibrium price

A price that equates supply and demand.

Long position

Owning assets with expectation of income or price appreciation; bullish outlook.

Short position

Selling borrowed assets in anticipation of a price decline; bearish outlook.

Market order

Order to buy or sell immediately at the going market price.

Limit order

Order to buy at a maximum price or sell at a minimum price specified by the investor.

Day order

Order canceled if not executed by the end of the trading day.

Good-till-cancelled (GTC)

Order that remains active until it is executed or canceled by the investor.

Stop-loss order

Order to sell once the price falls to a specified level to limit losses; becomes a market order once triggered.

Stop order to sell

Stop order that, when triggered, becomes a market order to sell.

Margin trading: LONG MARGIN

Margin account allows buying securities with borrowed money (call money); interest (call rate) is 1–3% above the broker’s rate; Margin Requirement (MR) set by the Fed; leverage magnifies returns (Magnification Factor = 1/MR).

Margin Call

Broker demand for additional equity when account equity hits the minimum maintenance threshold (MMR).

Maintenance Margin Requirement (MMR)

Minimum equity percentage required to maintain a margin account; varies by firm and can trigger a margin call.

Margin Percent

Equity divided by Market Value, expressed as a percentage.

Short selling

Selling stock borrowed from a broker with the expectation that the price will fall; the seller hopes to buy back later at a lower price.

Short Sales Against The Box

Selling short stock that is already owned; used to hedge; can be closed by delivering the stock later.

Reasons for Short Selling

Speculation, hedging against losses, or moving gains to a different tax year.

Initial margin

Collateral deposited upfront to meet the initial margin requirement when engaging in a margin transaction.

Collateral

Assets pledged to secure a loan or margin obligation in a trading account.

Commissions on short selling

Broker commissions charged when the stock is sold short and again when it is covered, plus any charges to the buyer.

Magnification Factor

The leverage effect of margin trading, calculated as 1/MR; higher leverage increases both potential gains and losses.