A customer says, "Sell if the price falls, but don't accept less than my target." Those instructions can conflict when the market drops suddenly.
Before entering an order, identify which side of the quote your customer will trade against. The bid is the price a buyer will pay. The offer, also called the ask, is the price a seller will accept. When trading against quoted prices, you generally sell at the bid and buy at the ask. These quotation terms appear in Securities and Exchange Commission (SEC) Rule 600(b)(16).
The quoted prices underlying the bid-ask spread are the bid and ask; the spread is their difference. With a $24.90 bid and $25.10 ask, the spread is $25.10 − $24.90 = $0.20 per share. Buying and immediately selling 100 shares at unchanged quotes costs 100 × $0.20 = $20 before other charges. Zero commission does not remove this spread cost.
Next, determine whether the firm arranges the trade or takes the other side itself. A broker acts as an agent, executing transactions for others.
Common mistakes
- Treating a $47 sell stop as a minimum sale price. A gap to $43 can produce a fill near $43.
- Using 50% for a long-stock maintenance call. Apply the 25% minimum to current value unless a higher house requirement governs.
- Depositing 150% in fresh cash for a short sale. On $5,000 of ordinary short-sale proceeds, the additional 50% deposit is $2,500.
Bottom line
- Customers generally buy at the ask and sell at the bid; the difference is the bid-ask spread.
- Market orders lack price guarantees; limits can remain unfilled; stops become market orders; stop-limits become limit orders.
- Ordinary stock and corporate-bond settlement is T+1; Regulation T's ordinary payment period is T+3, subject to earlier firm deadlines.
- Ordinary long-stock initial margin is 50%, generally with $2,000 minimum equity and the purchase-cost exception; maintenance is 25%.
Exam shortcut
Read the customer's verb first: buying compares with the ask; selling compares with the bid. Then locate any price boundary or activation condition. For margin calculations, identify long versus short before calculating equity. Use current market value, calculate both short-maintenance alternatives, and subtract actual equity from required equity. Circle the event a deadline governs: settlement, customer payment or a restriction period. Count business days only where the rule uses them.
The full lesson (about 3,310 words, 22 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- C17
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