Let us see, as an investor, how you can or will go about investing and once you give the order for buy or sell, what events happen. Typically, once you instruct your broker about your order, a chain of events set off. Without going into complete detail on each step, let us trace the process.
First, let us trace how a round lot order to buy 800 shares of McDonald’s. You call up your broker and find out what is the going market price. Say, the price is $60. Now if you put the market order then the chance is that you will get the share for $60. (I am saying chance because, by the time your order gets executed, the price may actually change.). Now say you put the order with the broker. Now the written order is wired to NY office of the brokerage firm. From there it is phoned to a clerk of the firm on the floor of the NYSE. The clerk notifies a member partner of the firm (only members are allowed to trade) via an annunciator board system. After collecting the order from the clerk, the member goes to the specialist who is dealing with MCD and confirms the ask and bid price. If the price is still $60, he executes the order. The member notes the transaction and with whom it was made, an exchange reported the transaction for reporting to the ticker, and the phone clerk phones you saying that the trade has been executed.
(Please reread the above once again after going through the entire trading chapter to have a better understanding of the whole process.)
After Hours
After-hours trading is a form of big-block trading that indeed does occur after the market closes for a period of time. Much of this trading is supported by Instinet, a network operated by Reuters that helps buyers meet sellers (there's no physical exchange where someone like a specialist works). Apparently, (I am not too sure!!!), this trading is NOT part of the reported closing prices you see in the newspapers. The data is apparently reported separately, at least on professional-level data systems. After-hours trading may experience significant deviations in price from the day's close, usually due to announcements made after the markets have closed.
But even the little guy can play after hours. The other markets can also affect a stock's price between 4PM and 9:30 AM EST. People tend to forget the global view. When the NYSE closes, the Pacific Exchange in LA opens. Then the Tokyo market opens around dinnertime in the U.S. Tokyo's closing bell marks the beginning of trading in Johannesburg, followed 2 hours later by London. Then, 2 hours before London closes, the NYSE opens back up. All 24 hours are covered by at least one market (the Pacific Exchange from 4 to 7 PM is the only exchange open during those three hours, but it completes the 24 hour day.) With so many multinational companies on many different markets, stock prices are inevitably going to have some discrepancy between the closing and opening bells on the Big Board.
Bid, Ask, and Spread
If you want to buy or sell a stock or other security on the open market, you normally trade via agents on the market scene who specialize in that particular security. These people stand ready to sell you a security for some asking price (the "ask") if you would like to buy it. Or, if you own the security already and would like to sell it, they will buy the security from you for some offer price (the "bid"). The difference between the bid and ask is called the spread. Stocks that are heavily traded tend to have very narrow spreads (e.g., 1/8 of a point), but stocks that are lightly traded can have spreads that are significant, even as high as several dollars.
So why is there a spread? The short answer is "profit." The long answer goes to the heart of modern markets, namely the question of liquidity. Liquidity basically means that someone is ready to buy or sell significant quantities of a security at any time. In the stock market, market makers or specialists (depending on the exchange) buy stocks from the public at the bid and sell stocks to the public at the ask (called "making a market in the stock"). At most times (unless the market is crashing, etc.) these people stand ready to make a market in most stocks and often in substantial quantities, thereby maintaining market liquidity.
Dealers make their living by taking a large part of the spread on each transaction - they normally are not long-term investors. In fact, they work a lot like the local supermarket, raising and lowering prices on their inventory as the market moves, and making a few cents here and there. And while lettuce eventually spoils, holding a stock that is tailing off with no buyers is analogous.
Because dealers in a security get to keep much of the spread, they work fairly hard to keep the spread above zero. This is really quite fair: they provide a valuable service (making a market in the stock and keeping the markets liquid), so it's only reasonable for them to get paid for their services. Of course you may not always agree that the price charged (the spread) is appropriate!
Occasionally you may read that there is no bid-ask spread on the NYSE. This is nonsense. Stocks traded on the New York exchange have bid and ask prices just like any other market. However, the NYSE bars the publishing of bid and ask prices by any delayed quote service. Any decent real-time quote service will show the bid and ask prices for an issue traded on the NYSE.
Broker
Only the members of the exchange (brokers) can participate in trading in the listed securities in the stock exchange. There are various types of brokers depending upon the type of job they perform.
Commission Brokers: About one half of all the brokers in NYSE are commission brokers. Their primary function is to buy or sell on behalf of their clients. They charge commission for this from the clients and hence the name. The prominent ones are Merrill Lynch, Pierce, Fenner & Smith, Shearson Lehman Hutton, and Prudential-Bache.
Floor Brokers: These are the brokers who actually execute the order on the floor of the Stock Exchange. The commission brokers pass on the order of their clients to these brokers and floor brokers execute the order.
Specialists: Specialists are the floor brokers who specialize in particular stock(s). They give two way quote for the stock in which they are specializing. The difference between the ask and bid price is the profit margin for the specialists. The main idea behind this is that the specialists will bring liquidity into the market by giving two-way quotes. There are around 500 specialists in NYSE. The specialist in IBM is deCordova, Cooper & Co., and for General Electric it is Strokes, Hoyt & Co.
Odd-lot Dealers: Trading on the floor of the exchange is conducted in round, or full, lot of 100 shares. But these brokers deal in lot, which is less than 100, or they deal in odd lots.
Registered Traders: There are some 30 brokers who trade among themselves and are not bothered about the public or other members. These are registered brokers. The rule and regulations of Stock Exchange for these brokers are more stringent than the other brokers.
Bond brokers: Bond brokers handle trades in the bond issues traded on the exchange.
Introducing Broker
An Introducing Broker (IB) is a futures broker who delegates the work of the floor operation, trade execution, accounting, etc. to a Futures Commission Merchant (FCM). In this relationship, the FCM maintains the floor operation and the IB maintains the relationship with retail clients. This is efficient because the work of a floor operation vs. the work of maintaining relationships and meeting the needs of retail customers have different requirements.
Another way to think of an IB is that of a segmented firm. The IB is not a middleman, but is in a partnership with the clearing firm. The clearing firm manages the floor and back office ops, and the IB is free to concentrate on his/her customers and their trading.
Several myths concerning IBs need debunking. First of all, the notion that an introducing broker is a "middleman" or that fees or commissions are necessarily higher is wrong. It's also wrong to say that an IB is a branch office. Yes, an IB may have branch offices, but an IB is not a branch office of a FCM. The IB is in a business partnership with an FCM, each handling their own piece of the work.
When it comes to ordering, if you are trading through an IB, it need not be any less efficient than trading with a vertically oriented firm that does everything. When you call an IB with an order, s/he can relay that order directly to the trading floor, or even give clients direct access to the floor themselves. If you call one of the big, vertically integrated firms your order is likely to take as many or more steps than it would with an IB.
In terms of commissions, an IB may maintain a low overhead and that lets him/her charge reasonable fees while maintaining a lot of support and specialized service that a big discount firm simply can't provide. There's more to trading than commissions, although most novices don't understand that.
Discount Brokers
A discount broker offers an execution service for a wide variety of trades. In other words, you tell them to buy, sell, short, or whatever, they do exactly what you requested, and nothing more. Their service is primarily a way to save money for people who are looking out for themselves and who do not require or desire any advice or hand-holding about their forays into the markets.
However, discount brokering is a highly competitive business. As a result, many of the discount brokers provide virtually all the services of a full-service broker with the exception of giving you unsolicited advice on what or when to buy or sell, but some do provide monthly newsletters with recommendations. Virtually all will execute stock and option trades, including stop or limit orders and odd lots, on the NYSE, AMEX, or NASDAQ. Most can trade bonds and U.S. treasuries. Most will not trade futures; talk to a futures broker. Most have margin accounts available. Most will provide automatic sweep of (non-margin) cash into a money market account, often with check- writing capability. All can hold your stock in "street-name", but many can take and deliver stock certificates physically, sometimes for a fee. Some trade precious metals and can even deliver them!
The firms can generally be divided into the following categories:
1. "Full-Service Discount": Provides services almost indistinguishable from a full-service broker such as Merrill Lynch at about 1/2 the cost. These provide local branch offices for personal service, newsletters, a personal account representative, and gobs and gobs of literature.
2. "Discount": Same as "Full-Service," but usually don't have local branch offices and as much literature or research departments. Commissions are about 1/3 the price of a full-service broker.
3. "Deep Discount": Executes stock and option trades only; other services are minimal. Often these charge a flat fee (e.g. $25.00) for any trade of any size.
4. Computer: Same as "Deep Discount", but designed mainly for computer users (either dial-up or via the internet). Some brokers offer an online trading option that is cheaper than talking to a broker.
Direct Investing and DRIPS
DRIPS offer an easy, low-cost way for buying stocks. Various companies allow you to purchase shares directly from the company and thereby avoid brokerage commissions. However, you must purchase the first share through a broker or other conventional means. In all cases, that first share must be registered in your name, not in street name. (A practical restriction here is that for some common kinds of accounts like IRAs (Some retirement benefit fund) you can't participate in a DRIP since the stock has to be held by the custodian.) Once you have that first share, additional shares can be purchased through the DRIP either through dividend reinvestments or directly by sending in a check. Thus the two names for DRIP: Dividend/Direct Re-Investment Plan. The periodic purchase also allows you to automatically dollar-cost-average the purchase of the stock.
A handful of companies sell their stock directly to the public without going through an exchange or broker even for the first share. These companies are all exchange listed as well, and tend to be utilities.
Free Ride Rules
When trading stocks, a "free ride" describes the case when you buy a security at 10 and sell it a day later (or an hour later) at 12, without having the free funds to cover the settlement of the trade at 10. This activity is prohibited by the exchanges (e.g., NYSE Rule 431 forbids member organizations from allowing their customers to day-trade in cash accounts). If you trade in a cash account, you must be able to settle the trade, even if you would take the profit from it in the same day.
Example:
Buy 1000 XXX at $10 on 7/10
Requires $10,000 free cash available to settle the trade.
Sell 1000 XXX at $15 on 7/11
It's a day later, and you will get $15,000 from the sale, but you still must be able to settle the original purchase without the proceeds of the sale for the first trade to be legitimate.
The rule on free rides should in no way be interpreted as a prohibition on "day trading" (i.e., trading very rapidly in and out of a stock). You can "day-trade" as much as you want, provided that you can settle the trade. The short answer is that you must use a margin account if you want to day-trade.
Being able to settle the trade means that you either have sufficient cash in your account to pay for the shares, or sufficient reserve in your margin account to cover the shares. Note that equity trades settle 3 market days after execution. Therefore, the window on short-term trading is not one day but rather three; i.e., any close of a position before settlement occurs would run into the same issue.
If you use cash, note that in a cash account you can spend a dollar only once. In other words, if you start the day in cash, you can buy stock and sells that stock -- and then are done trading for the day. If you start in stock you can sell it, spend the cash for another position, sell that position and then you are done.
If you use margin, keep in mind that your broker is allowed to delay the credit for your sale until settlement if they so choose, keeping you from using those funds for three days. If they are a market-making firm or are selling their order flow they will likely obstruct your intra-day and short term trading since it cuts into their bottom line. Unlike stocks, options settle the next day, which is both good and bad. Option trading basically requires that the funds be there before you place the trade, unless you like wiring funds around (and paying for the privilege of doing so).
Margin Trading
Securities can be bought either by cash or some borrowed funds or some mix of that. The primary purpose of borrowing and buying the securities is that the investor simply supplements his/her resources and tries to get more “bang for the buck”. Borrowing money from bank or the broker for the purpose of securities is called margin. When an investor buys on margin, he simply buys by borrowed funds. Regulation T of the Federal Reserve Board determines the amount that an investor can borrow. Regulation T permits brokers to lend up to fifty percent of the value of the stock or convertible bonds acquired or short sold by the investor, 70 % of the corporate bonds and about 90% of the U.S govt. securities. In stock market parlance, the cash paid by the customer (investor) is the customer’s margin. Thus if an investor buys corporate share worth $10,000 and puts up $7,000 in cash, his margin is $7,000 or 70%.
Margin (%) = Customer’s equity/Market value of securities.
After the initial transaction takes place, the Federal Reserve no longer concerns itself with the investor’s margin. The effect of fluctuating market prices on the customer’s margin is largely regulated by stock exchanges and the generally more restrictive policies of the brokerage firms themselves. The NYSE requires that customer maintain equity of 30%. Equity is simply the market value of the customer’s portfolio less margin debt, or the market value of any securities that were sold short. The Federal Reserve requirements are referred to as the initial margin requirement and that of exchange/broker’s guidelines are called maintenance requirements. Let’s try an example.
Assume that you buy 1000 shares of a $20 stock (net cost = $20,000) and you deposit $10,000 (50 % of $20,000) to meet the initial requirement. At this point your margin account shows a market value of $20,000 and a loan balance (called debit balance) of $10,000. The equity in the account stands at 10,000. With the $20,000 market value, the exchange requires that the equity must be at least $5,000, or 25% of $20,000. So far so good; the account more than conforms to the minimum maintenance rule (25%).
Customer’s Account
Stock $20,000 Debt $10,000
Equity $10,000
Margin=10,000/20,000 = 50%
Now suppose that the stock falls to $17. Where are we now?
Customer’s Account
Stock $17,000 Debt $10,000
Equity $7,000
Margin=7,000/17,000 = 41.20%
Note that all the shock of falling price must be absorbed by the customer’s equity since the debt has not been repaid. Also the lender’s (broker’s) stake is rising since the borrowed funds represent a larger part of the total value of the shares. The broker’s risk is rising.
Suppose the stock falls to $13. Let’s see what happens.
Customer’s Account
Stock $13,000 Debt $10,000
Equity $3,000
Margin=3,000/13,000 = 23%
To lift the margin to 30% (As per the exchange requirement) maintenance level requires equity 30 percent of $13,000 or $3,900. Hence, the broker will call the customer to pay $900 as the differential.
The other side of the coin is simple enough. Suppose that the stock rises. Let’s say to $25.
Customer’s Account
Stock $25,000 Debt $10,000
Equity $15,000
Margin=15,000/25,000 = 60%
Now what? Either you can take the extra 10% i.e. 5,000 home (Reg. T requires that margin should be only 50%) or now you can borrow more to buy more so that the margin drops to 50%. This is the beauty of margin where in investors play in the market with little money in their pocket.
Delivery-versus-payment
Delivery-versus-payment (DVP) is a method of settlement in which funds and the securities are transferred simultaneously, or, more generally where funds transfer is considered complete only when the securities are delivered and vice versa.
Insiders Trading
Insider trading refers to transactions in the securities of some company executed by a company insider. Although a company insider might theoretically be anyone who knows material financial information about the company before it becomes public, in practice, the list of company insiders (on whom newspapers print information) is normally restricted to a moderate-sized list of company officers and other senior executives. Smart companies normally warn all employees to be careful when they trade, "just in case". The U.S. Securities and Exchange Commission (SEC) has strict rules in place that dictate when company insiders may execute transactions in their company's securities. All transactions that do not conform to these rules are, in general, prosecutable offenses under US securities law.
Jargon and Terminologyy
Some common jargon that you should understand about trading equities is explained here briefly.
· AON, "all or none": A buy or sell order with this designation loses normal order priority if the amount of shares available doesn't match or exceed the order size. There may be some specialized circumstances where it could be useful, such as late in the day on a GTC (Good till cancelled) entry (to avoid a fractional fill such as 100 shares of a 1000 share order, with resulting doubling of total commissions when the rest of the order fills the following morning).
· blue-chip stock: A valuable stock that has proven itself; i.e., has been around for many years and has made piles of money. Examples are IBM, GE, Ford, etc. The name derives from the chips used in poker, blue always being the most valuable.
· bottom fishing: Purchasing of stock declining in value, or of stocks that have suffered drastic declines in their prices.
· day order: Order to buy/sell securities at a certain price that expires if not executed on the day it is placed.
· diluted shares: A way of characterizing the number of outstanding shares that a publicly held company could have. The diluted shares measure is the sum of the company's normally outstanding shares, the shares that would be outstanding if every warrant & stock option were exercised, and the shares that would be outstanding if every security convertible into the stock (e.g., certain preferred shares) were converted. This is sometimes used when computing earnings per share numbers. A larger number of outstanding shares means lower earnings per share, rather obviously; this is known as "dilution of earnings" or computation of "fully diluted" earnings.
· DNR, "do not reduce": This is usually assumed unless you specify otherwise, but different brokers may have different practices and some may require you to specify DNR if you want it. What it deals with is how the order is to be/not adjusted when dividends or other distributions occur. For example a $1/share dividend on a stock for which you have entered an order DNR brings the price closer to your bid or takes it further away from your offer. Without the DNR specification, on the ex-dividend date your order price is reduced by the amount of the distribution.
· FOK, "fill or kill": This means do it now if the stock is available in the crowd or from the specialist, otherwise kill the order altogether.
· Going long: Buying and holding stock.
· Going short: selling stock short, i.e., borrowing and selling stock you do not own with the intention of buying it later for less.
· GTC, "good till cancelled": Order to buy/sell securities at a certain price (a limit order); the limit order stays in the market until you call specifically to cancel it. Some brokers restrict the length of time a GTC can remain open to "end of same month", "no more than 30 days" or some such thing, but with most it becomes a permanent part of the book until it gets executed or you cancel.
· Overbought [Oversold]: Judgmental adjective describing a market or stock implying That people have been wildly buying [selling] it and that there is very little chance of it moving upward [downward] in the near term. Usually it applies to movement momentum rather than what the security should cost.
· Over valued, under valued, fairly valued: Judgmental adjectives describing that a market or stock is over/under/fairly priced with respect to what people believe the security is really worth.
· Uptick: Uptick means the next trade is at a higher price than the previous trade. Meaningful for the NYSE and AMEX; not so meaningful for OTC markets (NASDAQ). Certain transactions can only be executed on an Uptick (e.g., shorting).
· Downtick: Downtick means the next trade is at a lower price than the previous trade. See Uptick.
· Treasury shares: Shares taken from the company treasury (not the US Treasury!). Often occurs in the context of discussions about how companies fulfill share purchases within DRIP accounts.
· Plc: An abbreviation of Public Limited Corporation. This means that the company is not American, where "Inc." is used instead. Companies in many different countries use PLC, including Great Britain, South Africa, Australia, Hong Kong, etc.
· Inc: An abbreviation for Incorporated. Mostly used in the United States.
Clearing Process
After a trade has been executed, securities and money must change hands within five business days of the trade date, on what is called the settlement date (Saturdays, Sundays and holidays are excluded). For example, a trade on a Wednesday is settled the following Wednesday. Basically, two tasks are carried out in the clearing process: Trade comparison and settlement. Trade comparisons are made through the facilities of the clearing corporation that receives the report of each transaction from the brokers participating in the transaction. The largest clearing corporation is the National Securities Clearing Corporation (NSCC).
The first four days of the clearing period are devoted to the trade comparison process and to resolving any discrepancies in the transaction information provided by parties to a transaction. Unmatched trades are flagged, and advisory notices are sent to the participants who fail to report a transaction reported by the contra side. Much of the process is automated.
The second step in the clearing process – the final settlement- is also automated and usually carried out through computer book entries. The key change permitting the use of book entries has been the immobilizationy of securities certificates, which has been made possible by the increased willingness of brokers and financial institutions to forgo physical delivery of the certificates. Instead, certificates are immobilized at a securities depository. The principal depository is the
Depository Trust Company (DTC) owned jointly by NYSE, AMEX, National Association of securities Dealers (NASD), and its major participants (brokers and banks). The SEC and the Federal Reserve System as a limited trust company regulate the DTC.
Netting
This is a procedure in which debits (+) and the credit (-) for a particular category are offset against each other so as to arrive at the outstanding netted position. The actual transfer of fund and the securities (Remember??? This is also called settlement) is done on the netted position instead of the all transactions.
Example
Date
|
Broker
|
Transaction
|
Broker
|
Security
|
Amount
|
Price
|
Total
|
18-06-98
|
A
|
Buys from
|
B
|
McDonald
|
100
|
$30.00
|
$3,000
|
19-06-98
|
A
|
Buys from
|
B
|
McDonald
|
300
|
$32.00
|
$9,600
|
20-06-98
|
A
|
Sells to
|
B
|
McDonald
|
200
|
$31.00
|
$6,200
|
After netting, on the settlement day B has to deliver 200 shares of McDonald for $6,400. Netting is nothing but the outstanding position of each party on the day of settlement. The above is a simple case involving bilateral netting but in reality we see multilateral netting involving hundreds of parties and thousands of securities.
Portfolio Management
The different types of investment vehicles have different returns and risk associated with them. For example corporate stocks are more risky than govt. bonds but may pay higher return. Sometime the bullions are more risky and some times real estates are more risky. Generally more risk is associated with more return. Portfolio management is mixing different investment vehicles in different proportion so that the return and the risk of the portfolio is up to the customer’s requirement. Mind it not all have same return expectation nor they have same risk taking attitude.
Day, GTC, Limit, and Stop-Loss Orders
Day/GTC orders, limit orders, and stop-loss orders are three different types of orders you can place in the financial markets. This article concentrates on stocks. Each type of order has its own purpose and can be combined.
Day and GTC orders:
An order is canceled either when it is executed or at the end of a specific time period. A day order is canceled if it is not executed before the close of business on the same day it was placed. You can also leave the specific time period open when you place an order. This type of order is called a GTC order (good 'til cancelled) and has no set expiration date.
Limit orders:
Limit orders are placed to guarantee you will not sell a stock for less than the limit price, or buy for more than the limit price, provided that your order is executed. Of course, you might never buy or sell, but if you do, you are guaranteed that price or better.
For example, if you want to buy XYZ if it drops down to $30, you can place a limit buy @ $30. If the price falls to $30 the broker will attempt to buy it for $30. If it goes up immediately afterwards you might miss out. Similarly you might want to sell your stock if it goes up to $40, so you place a limit sell @ $40.
Stop-loss orders:
A stop-loss order, as the name suggests, is designed to stop a loss. If you bought a stock and worry about it falling too low, you might place a stop-loss sell order at $20 to sell that stock when the price hits $20. If the next trade after it hits $20 is 19 1/2, then you would sell at 19 1/2. In effect the stop loss sell turns into a market order as soon as the exchange price hits that figure.
Note that the NASDAQ does not officially accept stop loss orders since each market maker sets his own prices. Which of the several market makers would get to apply the stop loss? However, many brokers will simulate stop-loss orders on their own internal systems, often in conjunction with their own market makers. Their internal computers follow one or perhaps several market makers and if one of them quotes a bid, which trips the simulated stop order, the broker will enter a real order (perhaps with a limit - NASDAQ does recognize limits) with that market maker. Of course by that time the price might have fallen, and if there was a limit it might not get filled. All these simulated stop orders are doing is pretending they are entering real stops (these are not official stop loss orders in the sense that a stock exchange stop order is).
If you sell a stock short, you can protect yourself against losses if the price goes too high using a stop-loss order. In that case you might place a stop-loss buy order on the short position, which turns into a market order when the price goes up to that figure.
Example:
Let's combine a stop loss with a limit sell and a day order.
XYZ - Stop-Loss Sell Limit @ 30 - Day Order Only
The day order part is simple -- the order expires at the end of the day.
The stop-loss sell portion by itself would convert to a sell at market if the price drops down to $30. But since it is a stop-loss sell limit order, it converts to a limit order @ $30 if the price drops to $30.
It is possible the price drops to 29 1/2 and doesn't come back to $30 and so you never do sell the stock. Note the difference between a limit sell @ $30 and a stop-loss sell limit @ $30 -- the first will sell at market if the price is anywhere above $30. The second will not convert to a sell order (a limit order in this case) until the price drops to $30.
You can also work these same combinations for short sales and for covering losses of short stock. Note that if you want to use limit orders for the purpose of selling stock short, there is an exchange Uptick rule that says you cannot short a stock while it is falling - you have to wait until the next Uptick to sell. This is designed to prevent traders from forcing the price down too quickly.
Pink Sheet Stocks
A company whose shares are traded on the so-called "pink sheets" is commonly one that does not meet the minimal criteria for capitalization and number of shareholders that are required by the NASDAQ and OTC and most exchanges to be listed there. The "pink sheet" designation is a holdover from the days when the quotes for these stocks were printed on pink paper.
Process Date
Transaction notices from any broker will generally show a date called the process date. This is when the trade went through the broker's computer. This date is nearly always the same as the trade date, but there are exceptions.
One exception is an IPO; the IPO reservation could be made a week in advance and until a little after the IPO has gone off, the broker might not know how many shares his firm was allocated so doesn't know how many shares a buyer gets. A day or two after the IPO has gone off, things might settle down. (The IPO syndicate might be allowed to sell say 10% more shares than obligated to sell - and might sell those even after the IPO date "as of" the IPO date.) So a confirmation might list a trade date that is two days before the process date. Other times the broker might have made an error and admit to it, and so correct it "as of" the correct date. So the confirmation slip might show August 15 as the process date of a trade "as of" a trade date of August 12. It happens.
Round Lots of Shares
For every stock, the company in consolation with Stock Exchange decides the number of stocks in which all the trade will be done. Say IBM decides that this number is 100. All the transactions of IBM stock have to be in 100 stocks or some multiple of this. The lots of 100 or some multiple it are called round lots. This is done so that junta does not start buying and selling in 1 or 2 shares as per their whim. This will increase the pressure on the stock market tremendously. Interestingly there are some certificates which are denote the number of shares which are not multiple of 100. So how do they get traded? Some brokers might buy them from you at a discount to the market price and combining them (They trade with many players), make them round lot and sell in the market. The lots, which are not round lots, are called odd lotsy.
Shorting Stocks (Also called Short sale)
Shorting means to sell something you don't own. If I do not own shares of IBM stock but I ask my broker to sell short 100 shares of IBM I have committed shorting. In broker's lingo, I have established a short position in IBM of 100 shares. Or, to really confuse the language, I hold 100 shares of IBM short.
One key requirement for short sell is that short sell orders cannot be executed in down tick. (Please see the section on tick, Uptick, and downtick). An example will make it clear. Say you want to sell a stock for $42 and the preceding trade price was 41 .75. Then there is problem. But you cannot do the trade if the trade price was 43. If it were 42, then you have to go further back and see the preceding different price. You can only go for short sell if the preceding different price was less than $42. Remember that this rule is applicable only for the short sell and not for ordinary sell. This is done so as to avoid any price hammering by the brokers and taking the market for a ride.
Why would you want to short?
Because you believe the price of that stock will go down, and you can soon buy it back at a lower price than you sold it at. When you buy back your short position, you "close your short position." The broker will effectively borrow those shares from another client's account or from the broker's own account, and effectively lend you the shares to sell short. This is all done with mirrors; no stock certificates are issued, no paper changes hands, no lender is identified by name.
My account will be credited with the sales price of 100 shares of IBM less broker's commission. But the broker has actually lent me the stock to sell. No way is he going to pay interest on the funds from the short sale. This means that the funds will not be swept into the customary money-market account. Of course there's one exception here: Really big spenders sometimes negotiate a full or partial payment of interest on short sales funds provided sufficient collateral exists in the account and the broker doesn't want to lose the client. People like you and me, who are small fries can not expect to receive any interest on the funds obtained from the short sale.
If you sell a stock short, not only will you receive no interest, but also expect the broker to make you put up additional collateral. Why? Well, what happens if the stock price goes way up? You will have to assure the broker that if he needs to return the shares whence he got them (see "mirrors" above) you will be able to purchase them and "close your short position." If the price has doubled, you will have to spend twice as much as you received. So your broker will insist you have enough collateral in your account, which can be sold if needed to close your short position. More lingo: Having sufficient collateral in your account that the broker can glom onto at will, means you have "cover" for your short position. As the price goes up you must provide more cover.
Since you borrowed these shares, if dividends are declared, you will be responsible for paying those dividends to the fictitious person from whom you borrowed. Too bad.
Even if you hold your short position for over a year, your capital gains are taxed as short-term gains. A short squeeze can result when the price of the stock goes up. When the people who have gone short buy the stock to cover their previous short sales, this can cause the price to rise further. It's a death spiral - as the price goes higher, more shorts feel driven to cover themselves, and so on.
You can short other securities besides stock. For example, every time I write (sell) an option I don't already own long, I am establishing a short position in that option. The collateral position I must hold in my account generally tracks the price of the underlying stock and not the price of the option itself. So if I write a naked call option on IBM November 70s and receive a mere $100 after commissions, I may be asked to put up collateral in my account of $3,500 or more! And if in November IBM has regained ground and is at $90, I would be forced to buy back (close my short position in the call option) at a cost of about $2000, for a big loss.
Selling short is seductively simple. Brokers get commissions by showing you how easy it is to generate short-term funds for your account, but you really can't do much with them. If you are strongly convinced (and perhaps are out to ruin yourself…after all you are earning in rupee and a big drop in dollar will make a big hole in your pocket) a stock will be going down, buy the out-of-the-money put instead, if such a put is available.
A put's value increases as the stock price falls (but decreases sort of linearly over time) and is strongly leveraged, so a small fall in price of the stock translates to a large increase in value of the put. Let's return to our IBM, market price of 66 (ok, this article needs to be updated.) Let's say I strongly believe that IBM will fall to, oh, 58 by mid-November. I could short-sell IBM stock at 66, buy it back at 58 in mid-November if I'm right, and make about net $660. If instead it goes to 70, and I have to buy at that price, then I lose net $500 or so. That's a 10% gain or an 8% loss or so.
Now, I could buy the IBM November 65 put for maybe net $200. If it goes down to 58 in mid November, I sell (close my position) for about $600, for a 300% gain. If it doesn't go below 65, I lose my entire 200 investment. But if you strongly believe IBM will go way down, you should shoot for the 300% gain with the put and not the 10% gain by shorting the stock itself. Depends on how convinced you are.
Size of the Market
The "size of the market" refers to the number of shares (commonly quoted in round lots) that a specialist or market maker is ready to buy or sell. The size of the market information is supplied with a quote on professional data systems.
Tick, Uptick, and Downtick
The term "tick" refers to a change in a stock's price from one trade to the next. Really what's going on is that a comparison is made between trades reported on the ticker. If the later trade is at a higher price than the earlier trade, that trade is known as an "Uptick" trade because the price went up. If the later trade is at a lower price than the earlier trade, that trade is known as a "downtick" trade because the price went down.
Because this measure can only be calculated based on a reliable feed of stock trade data, it is probably only close to reality for trades on exchanges where there is a single specialist for each stock. Trades reported by market makers of the NASDAQ will possibly be out of strict time sequence; so evaluating the "tick" for shares traded over the counter is much trickier when compared to a NYSE-based tick.
Something called the "tick indicator" is a market indicator that tries to gauge how many stocks are moving up or down in price. The tick indicator is computed based on the last trade in each stock.
Note that certain transactions, namely shorting a stock, can only be executed on an Uptick, so this measure is not just of academic curiosity, it really is used to regulate the markets.
Transferring an Account
InvestorWords: http://www.investorwords.com
The Washington Post's Business Glossary: http://www.washingtonpost.com/wp-srv/business/longterm/glossary/glossary.htm
y Immobilization: A basic mechanism to enhance the efficiency and safety of clearing and settlement system in which the physical securities are stored by a depository/ies (Mostly it is a company) in a fixed place and recording the ownership details in electronic form. Owner of the securities are assigned separate accounts. Thereafter the trading is done in electronic form. It entails transfer of shares from the seller’s account to the buyer’s account. (This is very much like a bank where the is transferred from one account to another). The basic purpose of immobilization is to reduce risk which is a constant factor in physical handling of the securities.
Dematerialization: A related term to the above. Unlike the above in which the securities are stored in a place, in dematerialization, the physical securities are destroyed and the details are kept in the electronic form (Read computers!!). The trading is done very much in the same way as the previous one.
y These odd shares are generated mostly because of stock dividends. Otherwise the stocks which are issued by the company are in round lots.
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