Trading terms
The words on an order ticket, a margin notice or a tax form, defined exactly and then worked through with numbers, grouped by the part of trading they belong to.
Terms
These are reference pages. Each one starts with a one-line definition you could quote, then shows how the thing works on an actual account with a hypothetical trade, what tends to go wrong, and where to check the details on your own platform. Where a term comes from a rule, the page names who sets it: the SEC, FINRA or the IRS. Brokers can apply stricter versions of most of these rules, and the pages say so where it matters. For the practical side of the same topics, the questions answer what traders actually type, and the tips argue about what to do with it.
Orders
-
Bracket order
An entry order with two attached exits, a profit-taking limit above and a protective stop below for a long, linked so that when one exit fills the other is canceled. OCO order -
Stop-limit order
An order with two prices: when the stock reaches the stop price, a limit order is placed at the limit price, and it fills only at that limit or better. -
Time in force
The instruction attached to an order that sets how long it stays working before it expires or is canceled, such as for the day, until canceled, or only for an instant. TIF -
Trailing stop order
A stop order whose trigger price follows the market by a set dollar amount or percentage as price moves in your favor, and stays put when price moves against you.
Accounts and margin
-
Buying power
The amount your broker will let you commit to new positions right now. It depends on the account type, your equity, the margin rules and the broker's own limits. -
Margin call
A demand from your broker to add cash or securities, or reduce positions, because the equity in a margin account has fallen below the required maintenance level. Maintenance call
Settlement and rules
-
Freeriding
Buying securities in a cash account and paying for them with the proceeds of selling those same securities, without ever having paid for the purchase itself. Free-riding violation -
Good faith violation
In a cash account, buying a security with unsettled sale proceeds and then selling that new position before the original proceeds have settled. GFV -
Pattern day trader
Under FINRA Rule 4210, a margin customer with at least four day trades in any five business days, when those trades exceed six percent of the account's activity for the period. -
Settlement date
The day a trade is completed: the buyer's cash reaches the seller and the shares reach the buyer. For most US stock trades it is one business day after the trade date. T+1
Tax
-
Cost basis
What you paid to acquire shares, including commissions and fees, adjusted for later events such as splits and wash sales. Gain or loss on a sale is measured from it. Tax basis -
Holding period
The length of time you own shares before selling them. In the US, more than one year makes a gain or loss long term; one year or less makes it short term. -
Wash sale
A sale of stock or securities at a loss where you buy substantially identical stock or securities within 30 days before or after the sale. The IRS disallows the loss for that year.
Market structure
-
Level 2 quotes
A display of the bids and offers resting at several price levels beyond the best quote, often labeled by the venue or market participant posting them. Market depth -
Limit up-limit down
A US market mechanism that sets upper and lower price bands around a reference price based on a stock's recent trading, and pauses trading when the stock cannot trade within those bands. LULD -
National best bid and offer
The highest displayed bid and the lowest displayed offer for a stock across US exchanges, as defined under the SEC's Regulation NMS and published by the securities information processors. NBBO -
Payment for order flow
Compensation a broker receives from a market maker or trading venue in return for routing customer orders to it for execution. PFOF
Short selling
-
Hard to borrow
A stock whose shares are scarce in the lending market, so shorting it requires a locate that may be refused and usually carries a borrow fee charged for each day the short is open. Borrow fee -
Short interest
The total number of a stock's shares that have been sold short and not yet bought back to close, as reported by brokers to FINRA on a set schedule. Days to cover -
Uptick rule
An SEC price test under Regulation SHO. A 10% drop from the prior close restricts short sales to prices above the national best bid through the end of the next trading day. Rule 201
Price and volume
-
Float
The number of a company's shares available for public trading: shares outstanding minus shares that are closely held by insiders, large long-term holders, or under trading restrictions. Public float -
VWAP
Volume-weighted average price: the cumulative sum of price times volume divided by cumulative volume, usually calculated from the start of each trading session. Volume-weighted average price