Trading Types and Accounts

  1. Introduction
  2. Securities Markets
  3. Brokers and Dealers
  4. Economic Factors
  5. Stocks and Shareholder's Rights
  6. Options
  7. Investment Products
  8. Alternative Investments
  9. Risk of Investing
  10. Trading Types and Accounts
  11. Rules of SEC and FINRA
  12. Prohibited Activities

Trading Securities

Bids, Offers and Quotes in Trading Securities

In trading securities, bids, offers, and quotes play a crucial role in the buying and selling process. Bids represent the prices at which potential buyers are willing to purchase a security, indicating the maximum price they are willing to pay. On the other hand, offers, also known as asked prices, represent the prices at which potential sellers are willing to sell a security, indicating the minimum price they are willing to accept. When these bids and offers are communicated and displayed on an exchange or trading platform, they form the basis for quotes. Quotes reflect the current bid and offer prices available in the market for a particular security. By observing and analyzing these bids, offers, and quotes, traders and investors can gauge the supply and demand dynamics of a security and make informed decisions about buying or selling. The bids, offers, and quotes in trading securities provide transparency and serve as reference points for market participants to interact and execute trades effectively.

Bids, Offers, and Quotes

Long vs. Short Positions

Both long and short positions are common investment and trading strategies used by market participants. The choice between the two depends on an individual's outlook on the asset's price movement, risk tolerance, and investment objectives. It is crucial to thoroughly understand the risks associated with both long and short positions and to consider the advice of a financial professional before engaging in such transactions.

Long Vs. Short Positions

Markups vs. Commissions

It's important for investors and traders to be aware of both markups and commissions when engaging in securities trading. Markups can impact the purchase price of securities, while commissions affect the cost of executing trades. Understanding the rules and regulations regarding markups and commissions, as well as comparing costs across different brokers, can help traders make informed decisions and manage their trading expenses effectively.

Markup Vs. Commissions

Disclosure of Compensation

Disclosure of Compensation for Brokers and Dealers

The disclosure of compensation of brokers/dealers is a regulatory requirement aimed at ensuring transparency and protecting investors. It involves the disclosure of information regarding the compensation received by brokers and dealers for their services, such as commissions, markups, or other fees. This disclosure allows investors to understand the costs associated with their investments and make informed decisions.

Regulatory bodies, such as the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), enforce rules and regulations that govern the disclosure of compensation to broker/dealers to promote fair and ethical practices in the financial industry.

Disclosure of Compensation

Interest Rate Risks

Interest rate risks in securities refer to the potential impact of changes in interest rates on the value of fixed-income investments. When interest rates rise, the value of existing fixed-rate securities tends to decline, as investors can obtain higher returns from newly issued securities. Conversely, when interest rates fall, the value of fixed-rate securities increases. This risk is particularly relevant to bonds and other debt instruments, as their prices are inversely related to interest rates. Investors in securities should carefully consider interest rate risks and how they can affect the overall performance of their investment portfolio.

Interest Rate Risks

The Five Percent Policy is a regulation that requires broker-dealers to disclose the total cost, including markups or commissions, to customers before executing a trade. It aims to promote transparency and protect investors by ensuring they have a clear understanding of the costs associated with their trades.

Role of Brokers/Dealers

Roles of Brokers and Dealers

Brokers and dealers play integral roles in the financial markets. Brokers act as intermediaries between buyers and sellers, executing transactions on behalf of their clients and earning commissions or fees for their services. They provide market expertise, facilitate trade execution, and help investors access a wide range of securities. On the other hand, dealers are market participants who buy and sell securities for their own accounts. They may act as market makers, providing liquidity by continuously quoting bid and ask prices. Dealers earn profits from the spread between the buying and selling prices, and they help ensure market efficiency by actively participating in trading activities. Both brokers and dealers contribute to the functioning and liquidity of the financial markets, enabling investors to execute trades and access a variety of investment opportunities.

Acting as a Broker Acting as a Dealer Market Makers

Exchanges and Markets

Exchange Markets

Exchange markets, also known as financial exchanges or stock exchanges, play a vital role in the global economy by facilitating the buying and selling of financial instruments such as stocks, bonds, commodities, and derivatives. These markets provide a centralized platform where buyers and sellers can come together to execute trades in a transparent and regulated manner. Exchange markets serve as a meeting place for investors, traders, and institutions, providing liquidity and price discovery for various securities. They establish rules and regulations, enforce trading standards, and ensure fair and orderly transactions. Notable exchange markets include the New York Stock Exchange (NYSE), Nasdaq Stock Market, and London Stock Exchange, among others. These markets provide an essential infrastructure for investors to participate in the financial markets and contribute to the efficient allocation of capital.

Exchange Markets NYSE CBOE NASDAQ Over-the-Counter Markets ECN Custodian Banks

Types of Orders

Types of Orders

In the world of stocks and bonds, there are different types of orders that investors can use to execute trades and manage their investments. Market orders are the simplest type, allowing investors to buy or sell a security at the best available price in the market. Limit orders, on the other hand, allow investors to set a specific price at which they are willing to buy or sell a security. These orders are useful for controlling the execution price but may not guarantee immediate execution. Stop orders are designed to protect investors from potential losses by triggering a market order when the price of a security reaches a specified level. Good till Cancelled (GTC) orders are open orders that remain active until they are filled or canceled by the investor. Discretionary orders are placed by brokers on behalf of clients, giving them the authority to make trading decisions within predefined parameters. These types of orders provide investors with flexibility and control over their trading strategies in the dynamic world of stocks and bonds.

Market Orders Limit Orders Market-Not-Held Orders Stop Orders Good-till-Cancelled Orders Discretionary Orders Solicited vs. Non-Solicited Orders

FINRA Rule 2010 ensures that brokers and advisors act in the best interests of their clients, maintain integrity, and avoid deceptive, manipulative, or unethical practices in their business dealings.

Investment Returns

Investment Returns

Investment returns are a fundamental aspect of evaluating the performance and profitability of investments. They provide insights into the financial gains or losses generated by investing capital in various assets or securities.

There are several types of investment returns that investors consider. First, inflation-adjusted returns account for the impact of inflation on the purchasing power of the investment, providing a more accurate measure of the real return. After-tax returns take into consideration the effect of taxes on investment gains, reflecting the net return after accounting for applicable tax liabilities. Risk-adjusted returns assess the return in relation to the level of risk taken, allowing investors to evaluate the efficiency of their investment strategy. Total returns encompass all income generated by the investment, such as dividends, interest, and capital appreciation, providing a comprehensive measure of overall profitability. Holding period returns calculate the return over a specific period, considering the initial investment and any income or gains during that time. Lastly, return on capital measures the profitability of an investment in relation to the amount of capital invested, highlighting the efficiency of capital allocation.

Understanding and analyzing these various types of investment returns are crucial for assessing performance, making informed investment decisions, and managing risk effectively.

Investment Returns

Dividends

What are Dividends

Dividends in stocks and shares refer to the distribution of a company's profits to its shareholders. When a company generates earnings, it may choose to allocate a portion of those profits to shareholders as dividends. Dividends can be in the form of cash, additional shares of stock, or other assets. They serve as a way for companies to share their financial success with shareholders, providing them with a tangible return on their investment. Dividends are typically paid out on a regular basis, such as quarterly or annually, and are often a key factor considered by investors when evaluating the attractiveness of a stock. Companies with a history of consistent and increasing dividend payments are often favored by income-seeking investors. Dividends not only provide shareholders with a direct financial benefit but can also contribute to the overall total return of an investment in stocks and shares.

Cash Dividends on Shares

Cash dividends on shares refer to the distribution of a company's profits in the form of cash payments to its shareholders. When a company generates earnings, it may choose to allocate a portion of those profits to reward its shareholders. Cash dividends are typically paid out on a regular basis, such as quarterly or annually, and the amount distributed is based on factors like the company's profitability, financial stability, and dividend policy. Cash dividends provide shareholders with a direct and tangible return on their investment, allowing them to receive a portion of the company's success in the form of cash payments. For investors seeking income, cash dividends can be an attractive feature of owning stocks, as they provide a regular income stream and can contribute to the overall total return of the investment. Companies that consistently pay and increase their cash dividends are often regarded favorably by income-oriented investors.

Cash Dividends on Shares

Dividends in Shares

Dividends in shares, also known as stock dividends, are a method used by companies to distribute a portion of their earnings to shareholders in the form of additional shares of stock. Instead of paying out cash, companies issue new shares to existing shareholders based on their current holdings. This allows shareholders to increase their ownership in the company without making additional investments. Dividends in shares are typically expressed as a percentage or ratio, indicating the number of additional shares received for each share held. This type of dividend provides an opportunity for investors to benefit from the company's success by increasing their equity stake. Additionally, dividends in shares can be advantageous for companies as they retain cash within the business while rewarding shareholders. It's important for investors to consider the implications of stock dividends, such as dilution of ownership and potential tax consequences, when evaluating their investment strategy.

Dividends in Shares

Yields on Bonds

Yields on Bonds

Yields on bonds refer to the rate of return an investor can expect to receive from holding a bond. There are various types of yields used to evaluate bonds. One commonly used yield is the current yield, which is calculated by dividing the annual interest payment by the bond's current market price. Another important yield is the yield to maturity (YTM), which represents the total return an investor will earn if the bond is held until its maturity date, considering both the coupon payments and any potential capital gain or loss. Additionally, there is the yield to call (YTC), which measures the return if a bond is called by the issuer before its maturity. Yields on bonds play a crucial role in comparing and assessing the profitability and risk associated with different bond investments, helping investors make informed decisions based on their desired income and investment objectives.

Current Yields Current Yields on Discount Bonds Current Yields on Premium Bonds Yield to Maturity Yield to Call

Discretionary Accounts

Discretionary and Option Accounts

Discretionary accounts and option accounts are two important concepts in the realm of investment and trading. Discretionary accounts refer to accounts in which an investment advisor or broker has the authority to make trading decisions on behalf of the account holder. This arrangement allows for more flexibility and timely decision-making. Option accounts, on the other hand, are specific types of brokerage accounts that enable investors to trade options contracts. They come with certain requirements, including completing an options application, meeting minimum account balance criteria, and complying with regulatory rules such as FINRA Rule 2360 and NASD Rule 2510, which govern the conduct and responsibilities related to option trading activities. These accounts offer investors the opportunity to engage in more complex and specialized trading strategies.

Option Accounts Discretionary Accounts

Special Accounts

Special Accounts

Specialty accounts, also known as specialized or special-purpose accounts, offer unique features and benefits tailored to specific investment needs. These accounts cater to specialized investment strategies or requirements that may not be adequately addressed by traditional brokerage accounts. For example, an option account allows investors to trade options contracts, which provide the right to buy or sell securities at a predetermined price within a specified timeframe. Option accounts typically require additional approvals and assessments of an investor's knowledge and experience due to the complex nature of options trading. Another example is margin accounts, which allow investors to borrow funds from the brokerage to purchase securities, amplifying potential returns but also increasing risk. Other specialty accounts include trust accounts, custodial accounts for minors, retirement accounts, and accounts for foreign investors. Each specialty account has its unique features, eligibility requirements, and regulatory guidelines that investors need to understand and comply with to make informed investment decisions within the scope of their specific investment goals and strategies.

Wrap Fee Accounts Accounts for Corporations/Partnerships Trusts and Estates Foundations and Charities Education Accounts

Retirement Accounts

Individual and Group Retirement Accounts

When we show up to the present moment with all of our senses, we invite the world to fill us with joy. The pains of the past are behind us. The future has yet to unfold. But the now is full of beauty simply waiting for our attention.

Individual Retirement Accounts

When we show up to the present moment with all of our senses, we invite the world to fill us with joy. The pains of the past are behind us. The future has yet to unfold. But the now is full of beauty simply waiting for our attention.

IRAs Traditional IRA Roth IRA Keogh Plans

Group Retirement Accounts

When we show up to the present moment with all of our senses, we invite the world to fill us with joy. The pains of the past are behind us. The future has yet to unfold. But the now is full of beauty simply waiting for our attention.

Retirement Account Types 401k Plans 403(b) Plans 457 Plans

Welcome to your Trading Types / Accounts