Every recommendation you make ends in a trade. Four things decide what the client actually keeps: the order type, the account, the firm's role and the costs nobody itemizes.
The bid is the highest price a buyer, often a market maker, will pay right now. It is the price your client receives when selling. The offer, or ask, is the lowest price a seller will accept. It is the price your client pays when buying. A quote shows both with their sizes. Sizes are stated in round lots, which are 100 shares for stocks priced at $250 or less.
The bid always sits below the offer, and the difference is the spread. The spread is a cost the investor pays on every round trip, even at zero commission. Buy 1,000 shares at a $20.15 offer and sell them back at the $20.10 bid. You lose $50, though the market never moved. Spreads run wider for thinly traded, small or volatile securities and for many bonds.
Common mistakes
- Treating T+1 as the payment deadline. Trades settle T+1, but Regulation T payment is due within three business days. A frozen freerider gets no grace period at all and must pay before buying.
- Using 50% everywhere. Short initial margin is 150% of the sale, which is the proceeds plus 50%. Maintenance is 25% long and 30% short, so divide by 0.75 or 1.30, never 0.50.
- Reading FINRA's 5% policy as a cap. A 4% markup can still be unfair. Stock sold under a prospectus at the public offering price falls outside the policy.
Bottom line
- Customers buy at the offer and sell at the bid; the spread is a round-trip cost, wider for thin, small or volatile issues and many bonds.
- Market orders guarantee execution and limit orders guarantee price; buy limits and sell stops sit below the market, sell limits and buy stops above.
- A triggered stop becomes a market order, and a stop-limit may never fill.
- Trades settle T+1; Regulation T payment is due in three business days; freeriding brings a 90-day cash-in-advance freeze; IRAs cannot use margin under IRC 408(e)(4).
Exam shortcut
For any order question, place the order relative to the market first. Use "BLiSS": Buy Limit and Sell Stop sit below the market, and the other two sit above. Then ask whether the stem wants a guaranteed price (limit) or a guaranteed fill (market). For margin math, write three numbers before anything else: market value, debit or credit, and equity.
The full lesson (about 4,296 words, 29 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- C28
Browse all free Series 65 lessons or jump into free Series 65 practice questions.