pyxis financial training manual version 1.2

8/22/2019 Pyxis Financial Training Manual Version 1.2

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Financial Training Manual Version 1.2

Pyxis Solutions LLC, Confidential 2/25/2009

Pyxis Solutions

Financial Training Manual

Version 1.2


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Pyxis Solutions LLC, Confidential 2/25/2009 Page 2 of 50

Chapter 1 - Introduction to Markets ............................................................... 3Capital Market ........................................................................................................................................... 3Regulatory Agencies.................................................................................................................................. 3

SEC....................................................................................................................................................... 3National Association of Securities Dealers NASD............................................................................ 3

Types of exchanges.................................................................................................................................... 3National Securities Exchanges.............................................................................................................. 3NASDAQ.............................................................................................................................................. 4Over The Counter (O-T-C) ................................................................................................................... 4

Electronic Communications Network (ECN) ............................................................................................ 5Financial Information Exchange (FIX)................................................................................................. 6

Chapter 2 Brokerage Services ..................................................................... 8Prime Brokerage Services.......................................................................................................................... 8

Global Custody ..................................................................................................................................... 8Security borrowing / lending................................................................................................................. 8Primary vs. Secondary markets............................................................................................................. 8

Full Service Brokerage Services................................................................................................................ 9Account Types ...................................................................................................................................... 9Account privileges ................................................................................................................................ 9

Margin Accounts:.............................................................................................................................................. 9Options Account ............................................................................................................................................. 11

Principal vs. Agent.............................................................................................................................. 11

Chapter 3 - Trading Introduction.................................................................. 12Going long ............................................................................................................................................... 12Selling short............................................................................................................................................. 12Bid Price .................................................................................................................................................. 12Asked Price.............................................................................................................................................. 12Types of Securities .................................................................................................................................. 13

Chapter 4 - Trade Processing........................................................................ 14Types of Orders ....................................................................................................................................... 14Order qualifiers........................................................................................................................................ 17Priority of Orders..................................................................................................................................... 18

Chapter 5 - Securities Processing and Clearing............................................ 19Clearing and Settlement........................................................................................................................... 20

Chapter 6 - Corporate Actions ...................................................................... 23Dividends................................................................................................................................................. 23Rights Issue.............................................................................................................................................. 25Stock Split................................................................................................................................................ 25Exchange Offer........................................................................................................................................ 25Merger ..................................................................................................................................................... 25Reverse Split............................................................................................................................................ 25Bonus Issue.............................................................................................................................................. 26

Name Changes......................................................................................................................................... 26

Chapter 7 - Portfolio Management ............................................................... 27

Chapter 8 - Front Office Operations............................................................. 28Equity derivatives.................................................................................................................................... 28Fixed Income derivatives......................................................................................................................... 28Forwards.................................................................................................................................................. 29Futures ..................................................................................................................................................... 29

Glossary ........................................................................................................ 31


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Chapter 1 - Introduct ion to Markets

Capital Market

The capital market (securities market) is the market for securities, wherecompanies and the government can raise long-term funds. The capital marketincludes the stock market and the bond market. Financial regulators, such as theU.S. Securities and Exchange Commission, oversee the capital markets in theirrespective countries to ensure that investors are protected against fraud. Thecapital markets consist of the primary market, where new issues are distributedto investors, and the secondary market, where existing securities are traded.

Regulatory Agencies

SECThe Securities and Exchange Commission is a U.S. governmental agencyresponsible for the regulation of the securities industry.

National Association of Securities Dealers NASDNASD Inc. is an industry organization representing persons and companiesinvolved in the securities industry in the United States. It is also the primary SelfRegulatory Organization (SRO) responsible for the regulation of its industry, withoversight from the Securities and Exchange Commission. The NASD wasfounded in 1936.

Functions: Regulation and Licensure - NASD regulates trading in equities,corporate bonds, securities futures, and options, with authority over the activitiesof more than 5,025 brokerage firms, approximately 169,470 branch offices, andmore than 658,170 registered securities representatives. All firms dealing in

securities that are not regulated by another SRO, such as by the MunicipalSecurities Rulemaking Board ("MSRB"), are required to be member firms of theNASD.The NASD licenses individuals and admits firms to the industry, writes rules togovern their behavior, examines them for regulatory compliance, and issanctioned by the SEC to discipline registered representatives and member firmsthat fail to comply with federal securities laws and NASD's rules and regulations.It provides education and qualification examinations to industry professionals. Italso sells outsourced regulatory products and services to a number of stockmarkets and exchanges (e.g. American Stock Exchange ("AMEX") and theInternational Securities Exchange ("ISE").The NASD founded the NASDAQ ("National Association of Securities DealersAutomated Quotations") stock market in 1971. In 2006, NASD de-mutualizedfrom NASDAQ by selling its ownership interest.

Types of exchanges

National Securit ies Exchanges

A "national securities exchange" is a securities exchange that has registered withthe SEC under Section 6 of the Securities Exchange Act of 1934.


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There are currently ten securities exchanges registered with the SEC as nationalsecurities exchanges:

American Stock Exchange - AMEX Boston Stock Exchange Chicago Board Options Exchange Chicago Stock Exchange International Securities Exchange National Stock Exchange (formerly the Cincinnati Stock Exchange) The Nasdaq Stock Market LLC New York Stock Exchange - NYSE NYSE Arca (formerly known as the Pacific Exchange) Philadelphia Stock Exchange

NYSE: A corporation, operated by a board of directors, responsible for listingsecurities, setting policies and supervising the stock exchange and its memberactivities. The NYSE also oversees the transfer of members' seats on theExchange, judging whether a potential applicant is qualified to be a specialist.

The NYSE uses floor traders (people) to make trades, whereas the NASDAQand many other exchanges are computer driven.

NASDAQ

NASDAQ (acronymNationalAssociation ofSecurities DealersAutomatedQuotations system) is an American stock market. It was founded in 1971 by theNational Association of Securities Dealers (NASD), who divested it in a series ofsales in 2000 and 2001. It is owned and operated by The NASDAQ StockMarket, Inc., the stock of which was listed on its own stock exchange in 2002.NASDAQ is the largest electronic screen-based equity securities market in the

United States. With approximately 3,200 companies, it lists more companies andon average trades more shares per day than any other U.S. marketNASDAQ allows multiple market participants to trade through its ElectronicCommunication Networks (ECNs) structure, increasing competition. The SmallOrder Execution System (SOES) is another NASDAQ feature, introduced in1987, to ensure that in 'turbulent' market conditions small market orders are notforgotten but are automatically processed. With approximately 3,200 companies,it lists more companies and, on average, its systems trade more shares per daythan any other stock exchange in the world. NASDAQ will follow the New YorkStock Exchange in halting domestic trading in the event of a sharp and suddendecline of the Dow J ones Industrial Average.

In business, NASDAQ is often used as a non-acronym also.

Over The Counter (O-T-C)A security traded in some context other than on a formal exchange such as theNYSE, AMEX, etc. The phrase "over-the-counter" can be used to refer tostocks that trade via a dealer network as opposed to on a centralized exchange.It also refers to debt securities and other financial instruments such as


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derivatives, which are traded through a dealer network. In general, the reason forwhich a stock is traded over-the-counter is usually because the company issmall, making it unable to meet exchange listing requirements. Also known as"unlisted stock", these securities are traded by broker-dealers who negotiatedirectly with one another over computer networks and by phone.

Although NASDAQ operates as a dealer network, NASDAQ stocks are generallynot classified as OTC because the NASDAQ is considered a stock exchange. Assuch, OTC stocks are generally unlisted stocks which trade on the Over theCounter Bulletin Board (OTCBB) or on the pink sheets. Be very wary of someOTC stocks, however; the OTCBB stocks are either penny stocks or are offeredby companies with bad credit records.

Instruments such as bonds do not trade on a formal exchange and are, therefore,also considered OTC securities. Most debt instruments are traded by investmentbanks making markets for specific issues. If an investor wants to buy or sell abond, he or she must call the bank that makes the market in that bond and asks

for quotes.

Electronic Communications Network (ECN)ECN is the term used in financial circles for a type of computer system thatfacilitates trading of financial products outside of stock exchanges. The primaryproducts that are traded on ECNs are stocks and currencies. ECNs came intoexistence in 1998 when the SEC authorized their creation. ECNs increasecompetition among trading firms by lowering transaction costs, giving clients fullaccess to their order books, and offering order matching outside of traditionalexchange hours.

The functioning of ECNsIn order to trade with an ECN, one must be a subscriber. ECN subscribers canenter orders into the ECN via a custom computer terminal or network protocols.The ECN will then match contra-side orders (i.e. a sell-order is "contra-side" to abuy-order with the same price and share count) for execution. The ECN will postunmatched orders on the system for other subscribers to view. Generally, thebuyer and seller are anonymous, with the trade execution reports listing the ECNas the party.Some ECNs may offer additional features to subscribers such as negotiation,reserve size, and pegging, and may have access to the entire ECN book (asopposed to the "top of the book") that contains important real-time market data

regarding depth of trading interest.

ECN fee structureECN's fee structure can be grouped in two basic structures: a classic structureand a credit (or rebate) structure. Both fee structures offer advantages of theirown. The classic structure tends to attract liquidity removers while the creditstructure appeals to liquidity providers. However since both removers and


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providers of liquidity are necessary to create a market ECNs have to choose theirfee structure carefully.In a credit structure ECNs make a profit from paying liquidity providers a creditwhile charging a debit to liquidity removers. Their fees range from $0.002 to$0.0027 per share for liquidity providers and $0.003 to $0.0025 per share forliquidity removers. The fee can be determined by monthly volume provided and

removed, or by a fix structure, depending on the ECN, and it's known as aliquidity rebate, or credit. This structure is common on the NASDAQ market. In aclassic structure, the ECN will charge a small fee to all market participants usingtheir network, both liquidity providers and removers. They can also give lowerprice to large liquidity providers in order to attract volume to their networks. Feesfor ECNs that operate under a classic structure range from $0 to $0.0015, oreven higher depending on each ECN. This fee structure is more common in theNYSE, however recently some ECNs have moved their NYSE operations into acredit structure.

Financial Information Exchange (FIX)The Financial Information eXchange (FIX) protocol is an electroniccommunications protocol developed for international real-time exchange ofinformation related to the securities transactions and markets. It is a self-describing protocol in many ways similar to other self-describing protocols suchas the newer XML; however largely because its use and general acceptancepredates XML it remains much more common than XML in securities tradingsystems.FIX Protocol, Ltd. is the company established for the purpose of ownership andmaintenance of the specification. It owns the specification, while keeping it in thepublic domain.

FIX is used by both the buy side (institutions) as well as the sell side(brokers/dealers) of the financial markets. Among its users are mutual funds,investment banks, brokers, stock exchanges and ECNs.The FIX protocol is a technical specification for electronic communication oftrade-related messages. More precisely, the FIX protocol is a series ofmessaging specifications developed through the collaboration of banks, broker-dealers, exchanges, industry utilities and associations, institutional investors, andinformation technology providers from around the world. These marketparticipants share a vision of a common, global language for automated tradingof securities, derivatives, and other financial instruments.FIX is open and free, but is not software. Rather, FIX is a specification around

which software developers can create commercial or open-source software, asthey see fit. As the market's leading trade-communications protocol, FIX isintegral to many order management and trading systems. Yet, its power isunobtrusive, as users of these systems can benefit from FIX without knowing thelanguage itself.FIX messages are formed from a number of fields, each field is a tag valuepairing that is separated from the next field by a delimiter SOH. The TAG is astring representation of an integer that indicates the meaning of the field. Thevalue is an array of bytes that hold a specific meaning for the particular TAG. eg


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TAG 48 is securityID and is a string that identifies the security, TAG 22 isIDSource and is an integer that indicates the identifier class being used. In themain the value is readable text however fields can be encrypted and thus thevalue can be pure binary and include the normal delimiter SOH - binary fields arealways preceded by a length field. The FIX protocol defines meanings for mostTAGs and a range of TAGs is reserved for private use between consenting

parties.The FIX protocol also defines sets of fields that make a particular message,within the set of fields some will be mandatory and others optional. The orderingof fields within the message is generally unimportant; however as noted length ofencryption fields precede the encrypted fields also repeating groups arepreceded by a count. The message is broken into three distinct sections: thehead, body and tail. Fields must remain within the correct section and within eachsection the position may be important as fields can act as delimiters that stop onemessage from running into the next - the final field in any FIX message is TAG10 (checksum).There are two main groups of messages - admin and application. The admin

messages handle the basics of a FIX session. They allow for a session to bestarted and terminated and for recovery of missed messages. The applicationmessages deal with the sending and receiving of trade-related information suchas an order request or information on the current state and subsequent executionof that order.Since its inception in 1992 as a bilateral communications framework for equitytrading between Fidelity Investments and Salomon Brothers, FIX has become thestandard electronic protocol for pre-trade communications and trade execution.Although it is mainly used for equity transactions in the front office area, bond,derivatives and FX-transactions are also possible. One could say that whereasSWIFT is the standard for back office messaging, FIX is the standard for front

office messaging. However, today, the membership of FIX Protocol Ltd. isextending FIX into block-trade allocation and other phases of the trading process,in every market, for virtually every asset class.


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Chapter 2 Brokerage Services

Prime Brokerage Services

As opposed to a full service broker, who services clients daily trade requests andmanages cash on the local level, the prime brokerage serves a more macro

purpose. Some services offered are global custody and securities borrowing /lending.

Global CustodyGlobal custody is the processing of cross-border securities trades, keepingfinancial assets safe and servicing the associated portfolios (on an internationallevel.)Custodians hold a range of assets on behalf of their customers. These includeequities, government bonds, corporate bonds, other debt instruments, mutualfund investments, warrants and derivatives.Institutional investors, money managers and broker/dealers are among those

who rely on custodians and other market participants for the efficient handling oftheir worldwide securities portfolios.Custodians effect settlement of trades (that is, completion of a transaction,wherein the seller transfers securities or financial instruments to the buyer andthe buyer transfers money to the seller) and provide safekeeping of the assets onbehalf of clients. The services also include:

collection of income arising from the portfolios (dividends and interestpayable)

application of entitlements to reduced rates of withholding tax at sourceand reclaiming withheld taxes after-the-fact

notification and dealing with corporate actions (such as bonus issues,rights issues and takeovers)

Security borrowing / lendingIn order to facilitate a clients short sales, the prime brokerage must borrowshares from their own in-house account and lend them to the client for therequired time period (that is, until the client completes the transaction by buyingthe shares on the open market and returning them to the brokerage house.)

Primary vs. Secondary marketsA primary market is the market for new issues of securities, as distinguished from

the Secondary market, where previously issued securities are bought and sold(either through an exchange or over the counter). A market is primary if theproceeds of sales go to the issuer of the securities sold. The issuance of newsecurities in the primary market is the service of a prime broker (such as aninvestment bank.)


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Full Service Brokerage ServicesAccount Types

1. Joint Account2. Corporate Account3. Partnership Account

Joint Account: A brokerage or bank account that is owned together (jointly) bytwo or more people. A joint account agreement is typically needed to open suchan account. This agreement will detail whether transactions require thesignatures of all parties or whether one party can take actions on his/her own.

Corporate Account: When opening an account for a corporation, a copy of theCorporate Resolution must be obtained. The Resolution will list those individualsauthorized to act on behalf of the corporation.

If opening a margin or option account, both a Corporate Resolution and aCorporate Charter are required. The Corporate Charter will specify if these types

of accounts are allowed.

Partnership Account: To open an account for a partnership, certain informationis required such as name, address, citizenship tax- identification number etc. Inaddition the account requires signature of all partners and a copy of thepartnership agreement. The partnership agreement will specify those partnersauthorized to execute transactions on behalf of the partnership,

Account privi leges

Margin Accounts:

For the average person, the purchase of a home or automobile is usually madeusing a small amount of personal funds and a much larger percentage of moneythat's borrowed from another source. Most investment securities can be boughtin exactly the same manner. When an investor decides to buy securities onmargin a special account, known as a margin account, must be opened with astock brokerage firm. The investor supplies a down payment and the firm lendsthe remaining balance for the transaction and actually purchases the securitiesfor the investor. Up to 50% of the purchase price of securities bought in thismanner can be borrowed funds. The investor can therefore buy up to twice asmuch market value of stock on margin as is possible using his or her own cash(for those securities which can be bought on margin; not all can). This use of

borrowed funds to increase the percentage of profit is known as leverage.This leveraged position creates for the investor an opportunity to make moremoney for a given sum of investment dollars. At the same time, however, itcreates the opportunity for losses which are not limited to the initial investment.These losses can occur very quickly and be quite extreme. Another considerationin margin trading is that interest is charged by the broker on the borrowed funds(known as the debit balance), which can be substantially more than the dividendsand interest being earned by the purchased securities.


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Margin trading is a relatively sophisticated market technique and must beapproached with great care. Due to the leveraged position, although greatergains can be achieved than will full cash transactions, the investor is exposed tothe risk of deep losses. If the market value of the margined securities dropssignificantly, the brokerage firm will issue a maintenance- ormargin call, whichis a demand that the investor deposit more collateral money into the margin

account. If the investor cannot or chooses not to deposit more funds, the brokerwill sell some or all of the securities to bring the account back to a properlymargined condition. Normally these forced sales are executed in rapidly fallingmarkets, which actually serves to "lock in" the investor's losses.Securities purchased on margin are not forwarded to the investor. They remainwith the brokerage firm as collateral for the debit balance. Such securities aresaid to be in street name; they're held by the broker in the broker's name (theregistered owner), but the investor is the true or beneficial owner. The brokeragefirm sends the investor a monthly statement of the account showing thesecurities and cash that are being held for the investor (this is done for cashaccounts, as well). The account will refer to the investor's position as "long" or

"short": "long is a positive position in which the investor owns a particular stock;"short" refers to the position of owing stock which was borrowed to complete asale. Trades are posted to the account on the settlement date (the date that thepurchased securities must be paid for), which is generally three business daysafter the actual trade date. For options and government securities, the settlementdate is normally the next business day.

Maintenance Margin:Maintenance margin is the minimum amount of equity that must be maintained ina margin account. In the context of the NYSE and NASD, after an investor hasbought securities on margin, the minimum required level of margin is 25% of the

total market value of the securities in the margin account. Keep in mind that thislevel is a minimum, and many brokerages have higher maintenancerequirements of 30-40%.Maintenance margin is also referred to as "minimum maintenance" or"maintenance requirement".As governed by the Federal Reserve's Regulation T, when a trader buys onmargin, key levels must be maintained throughout the life of the trade. First off, abroker cannot extend any credit to accounts with less than $2,000 in cash (orsecurities). Second, the initial margin of 50% is required for a trade to be entered.Finally, the maintenance margin says that an equity level of at least 25% must bemaintained. The investor will be hit with a margin call if the value of securities

falls below the maintenance margin.

Margin Call:A margin call is a broker's demand on an investor using margin to depositadditional money or securities so that the margin account is brought up to theminimum maintenance margin.This is sometimes called a "fed call" or "maintenance call". You would receive amargin call from a broker if one or more of the securities you had bought (with


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borrowed money) decreased in value past a certain point. You would be forcedeither to deposit more money in the account or to sell off some of your assets.

Leverage:Leverage is the use of various financial instruments or borrowed capital, such asmargin, to increase the potential return of an investment.

Options AccountA brokerage account that is approved to hold option positions or trades.

Principal vs. AgentPrincipal: The main party to a transaction, acting as either a buyer or seller forhis/her own account and risk.

Agent: A securities salesperson who represents a broker-dealer or issuer whenselling or trying to sell securities to the investing public.


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Chapter 3 - Trading Introduct ion

Going longThe purchase of a stock, commodity, or currency for investment or speculation.

Selling short

A market transaction in which an investor sells borrowed securities in anticipationof a price decline and is required to return an equal amount of shares at somepoint in the future.

The payoff to selling short is the opposite of a long position. A short sellerwill make money if the stock goes down in price, while a long position makesmoney when the stock goes up. The profit that the investor receives is equal tothe value of the sold borrowed shares less the cost of repurchasing the borrowedshares.Suppose 1,000 shares are short sold by an investor at $25 apiece and $25,000 isthen put into that investor's account. Let's say the shares fall to $20 and the

investor closes out the position. To close out the position, the investor will needto purchase 1,000 shares at $20 each ($20,000). The investor captures thedifference between the amount that he or she receives from the short sale andthe amount that was paid to close the position, or $5,000.There are also margin rule requirements for a short sale in which 150% of thevalue of the shares shorted needs to be initially held in the account. Therefore, ifthe value is $25,000, the initial margin requirement is $37,500 (which includesthe $25,000 of proceeds from the short sale). This prevents the proceeds fromthe sale from being used to purchase other shares before the borrowed sharesare returned.Short selling is an advanced trading strategy with many unique risks and pitfalls.

Novice investors are advised to avoid short sales because this strategy includesunlimited losses. A share price can only fall to zero, but there is no limit to theamount it can rise.

Bid PriceThe price a buyer is willing to pay for a security. This is one part of the bid withthe other being the bid size, which details the amount of shares the investor iswilling to purchase at the bid price. The opposite of the bid is the ask price, whichis the price a seller is looking to get for his or her shares. The use of bid and askis a fundamental part of the market system, as it details the exact amount thatyou could buy or sell at any point in time. Remember that the current price is not

the price for which you can purchase the security, but the price at which theshares last traded hands. If you want to get an idea of the price for which you canbuy a security, you need to look at the bid and ask prices because they will oftendiffer from the current price.

Asked PriceThe price a seller is willing to accept for a security, also known as the offer price.Along with the price, the ask quote will generally also stipulate the amount of the


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security willing to be sold at that price.Sometimes called "the ask".This is the opposite of bid, which is the price a buyer is willing to pay for asecurity, and the ask will always be higher than the bid. The terms "bid" and "ask"are used in nearly every financial market in the world covering stocks, bonds,currency and derivatives. An example of an ask in the stock market would be

$5.24 x 1,000 which means that someone is offering to sell 1,000 shares for$5.24.

Spread: The difference between the bid and the ask price of a security or asset.

Insiders: Any person who has knowledge of, or access to, valuable nonpublicinformation about a corporation. Examples of an insider include the directors andofficers of a company. Stockholders who own more than 10% of equity in acompany are also insiders.

Types of Securit ies

Equity - The ownership interest of common and preferred stockholders in acompany. Equity is traded in shares of a company over national securities and/orover-the-counter markets.

Debt - a bond or debenture is a debt instrument that obligates the issuer to payto the bondholder the principal (the original amount of the loan) plus interest.Thus, a bond is essentially an I.O.U. (I owe you contract) issued by a private orgovernmental corporation. The corporation "borrows" the face amount of thebond from its buyer, pays interest on that debt while it is outstanding, and then"redeems" the bond by paying back the debt at maturity.

Derivative - A financial instrument, traded on or off an exchange, the price ofwhich is directly dependent upon the value of one or more underlying securities,equity indices, debt instruments, commodities, other derivative instruments, orany agreed upon pricing index or arrangement. Derivatives involve the trading ofrights or obligations based on the underlying product but do not directly transferproperty. They are used to hedge risk or to exchange a floating rate of return fora fixed rate of return. Derivatives will be explained in further detail in a latersection.


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Chapter 4 - Trade ProcessingOrder:The instruction, by a customer to a brokerage, for the purchase or sale ofa security with specific conditions. There are several different types of orders,each offering different conditions.Types of Orders

I. Market Order

II. Limit OrderIII. Stop Order

a) Buy Stop Orderb) Sell Stop Order

IV. Limi t or betterV. Stop- Limit Order

a) Sell Stop- Limit Orderb) Buy Stop- Limit Order

Market Order: An order to buy or sell a stock immediately at the best availablecurrent price.

A market order is sometimes referred to as an "unrestricted order". A marketorder guarantees execution, and it often has low commissions due to the minimalwork brokers need to do. Be wary of using market orders on stocks with a lowaverage daily volume: in such market conditions the ask price can be a lot higherthan the current market price (resulting in a large spread). In other words, youmay end up paying a whole lot more than you originally anticipated! It is muchsafer to use a market order on high-volume stocks, such as Microsoft or Wal-Mart.

Limit Order: An order placed with a brokerage to buy or sell a set number of

shares at a specified price or better. Limit orders also allow an investor to limitthe length of time an order can be outstanding before being canceled. Limitorders typically cost more than market orders. Despite this, limit orders arebeneficial because when the trade goes through, investors getthe specified purchase or sell price. Limit orders are especially useful on a low-volume or highly volatile stock

Stop Order: An order to buy or sell a security when its price surpassesa particular point, thus ensuring a greater probability of achievinga predetermined entry or exit price, limiting the investor's loss or locking in his orher profit. Once the price surpasses the predefined entry/exit point, the stop

order becomes a market order.

Also referred to as a "stop" and/or "stop-loss order", Investors commonly use astop order before leaving for holidays or entering a situation where they areunable to monitor their portfolio for an extended period.

Stops are not a 100% guarantee of getting the desired entry/exit points. Forinstance, if a stock gaps down then the trader's stop order will be triggered (orfilled) at a price significantly lower than expected.


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Traders who use technical analysis will place stop orders below major movingaverages, trend lines, swing highs, swing lows or other key support or resistancelevels.

Buy Stop Order: An order to buy a security which is entered at a price above the

current offering price. It is triggered when the market price touches or goesthrough the buy stop price. People using a buy stop hope to gain if momentumgains on a particular stock. If the price exceeds the price you have set, it willautomatically trigger a market order

Limit or better: Indicates an order to buy a security at the indicated limit price orlower, or to sell a security at the indicated limit price or higher.

Stop- Limit Order: An order placed with a broker that combines the featuresof stop order with those of a limit order. A stop-limit order will be executed at aspecified price (or better) after a given stop price has been reached. Once the

stop price is reached, the stop-limit order becomes a limit order to buy (or sell) atthe limit price or better.

The primary benefit of a stop-limit order is that the trader has precise control overwhere the order should be filled. The downside, as with all limit orders, is that thetrade is not guaranteed to be executed if the stock/commodity does not reach thelimit price. A stop order is an order that becomes executable once a set price hasbeen reached and is then filled at the current market price. A limit order isone that is at a certain price or better. By combining the two orders, the investorhas much greater precision in executing the trade. Because a stop order is filledat the market price after the stop price has been hit, it's possible that you could

get a really bad fill in fast-moving markets. Also, some brokers don't accept stop-limits for all securities, specifically over-the-counter stocks.

For example, let's assume that ABC Inc. is trading at $40 and an investor has putin a stop-limit order to buy with the stop price at $45 and the limit price at $46. Ifthe price of ABC Inc. moves above $45 stop price, the order is activated andturns into a limit order. As long as the order can be filled under $46 (the limitprice), then the trade will be filled. If the stock gaps up above $46, the order willnot be filled.


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The chart below details which order types fall below / above the price as set bythe (secondary) market.

Market Price

Buy Stop-LimitBuy Stop

Sell Limit

Buy Limit

Sell StopSell Stop-Limit

ORDERS ENTEREDBELOW THE MARKET

ORDERS ENTERED

ABOVE THE MARKET


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Order qualif iersI. Day Order

II. Good ti l Cancelled (G.T.C) or Open OrderIII. At The OpeningIV. At The CloseV. Not Held (NH)

VI. All or NoneVII. Immediate or Cancel

VIII. Fill or Kil l

Day Order: Any order to buy or sell a security that automatically expires if notexecuted on the day the order is placed. A day order will not be executed if thelimit or stop order prices were not met during the day. A way to increase the lifeof an order is to order securities on a 'good 'till cancelled' basis, where, as thename implies, the trade will not expire until it is cancelled or until it reaches amaximum time limit set by the brokerage.

Good til Cancelled (G.T.C) or Open Order: An order to buy or sell a security ata set price that is active until the investor decides to cancel it or the trade isexecuted. If an order does not have a good-till-canceled instruction then theorder will expire at the end of the trading day the order was placed. In mostcases GTC orders are canceled by brokerage firms after 30-90 days. These typeof orders are traditionally placed at price points away from the price of the stockat the time the order is placed. For example if a stock you held was currently $40but you believe it will go to $50 at which point you would sell then you would usea GTC order. Once the GTC order to sell is placed if the price of the stockreaches $50 at any point over the next few months your shares will be sold.

At The Opening: An order specifying that a trade is to be executed at theopening of the market, otherwise it's canceled. With this type of order you are notnecessarily guaranteed the opening price.

At The Close: An order specifying that a trade is to be executed at the close ofthe market, or as near to the closing price as possible. Its essentially a marketorder that doesn't get entered until the last minute (or thereabouts) of trading.With this type of order you are not necessarily guaranteed the closing price butusually something very similar.

Not Held (NH): A market or limit order that gives the broker or floor trader both

time and price discretion to attempt to get the best possible price. Aperson placing a not-held order exhibits great faith that the floor trader will beable to attain a better price than the current one. Although the floor trader hasprice and time discretion, he or she cannot be responsible for any losses that theshareholder may suffer as a result of this type of order. Often this type of order isapplied to international equities to the fact that shareholders trust the trader'sjudgment more than they trust their own.


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Al l or None: A condition used on a buy or sell order to instruct the broker to fillthe order completely or not at all. For example, if you send an AON order to yourbroker requesting 200 shares at $15, the broker will not fill the order unless s/hecan get you the 200 shares at $15. This prevents you from having orders halffilled before they expire.

Immediate or Cancel: An order requiring that all or part of the order be executedimmediately after it has been brought to the market. Any portions not executedimmediately are automatically cancelled. This is used for large orders wherefilling quickly can be difficult.

Fill or Kill: An order to fill a transaction immediately and completely or not at all.This type of order is usually for a large quantity of stock, and must be filled in itsentirety or canceled (killed). Examples include market and limit orders requiringimmediate executing. In reality, the fill-or-kill type of trade does not occur veryoften.

Priority of Orders1. Price2. Time3. Size


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Chapter 5 - Securities Processing and ClearingBelow is a simple flowchart detailing the back-end clearing and settlementworkflow of a clients trade:


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Clearing and Settlement

Clearing House:An agency or separate corporation of an exchange responsible for settlingtrading accounts, clearing trades, collecting and maintaining margin monies,regulating delivery and reporting trading data.

(Example: Futures clearing house - Clearing houses act as third parties to allfutures and options contracts - as a buyer to every clearing member seller and aseller to every clearing member buyer. Each futures exchange has its ownclearing house. All members of an exchange are required to clear their tradesthrough the clearing house at the end of each trading session and to deposit withthe clearing house a sum of money (based on clearinghouse marginrequirements) sufficient to cover the member's debit balance. For example, if amember broker reports to the clearing house at the end of the day total purchaseof 100,000 bushels of May wheat and total sales of 50,000 bushels of Maywheat, he would be net long 50,000 bushels of May wheat. Assuming that this isthe broker's only position in futures and that the clearing house margin is six

cents per bushel, this would mean the broker would be required to have $3,000on deposit with the clearing house. Because all members are required to cleartheir trades through the clearing house and must maintain sufficient funds tocover their debit balances, the clearing house is responsible to all members forthe fulfillment of the contracts.)

DTCC:The DTCC is the world's largest securities depository, holding trillions of dollarsin assets for the members of the financial industry that own the corporation. It isalso a national clearinghouse for the settlement of corporate and municipalsecurities transactions. The DTCC, a member of the Federal Reserve System,

was created in 1999 as a holding company with two primary subsidiaries, theDepository Trust Company (DTC) and the National Securities ClearingCorporation (NSCC).

DTC:The Depository Trust Company (DTC) established in 1973, was created toreduce costs and provide clearing and settlement efficiencies by immobilizingsecurities and making book-entry changes to ownership of the securities. Itprovides settlement services for all NSCC trades and for institutional trades,which typically involve money and securities transfers between custodian banksand broker/dealers. In 2004, DTC settled transactions worth $275.2 trillion, and

made 243.1 million book-entry deliveries. In addition to settlement services, DTCbrings efficiency to the securities industry by retaining custody of almost 2.5million securities issues worth about $28.3 trillion, including securities issued inthe United States and more than 100 other countries.

DTC is owned by many companies in the financial industry, with the NYSE beingone of its largest shareholders.


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NSCC:National Securities Clearing Corporation NSCCA subsidiary of the DTCC that provides centralized clearing, information, andsettlement services to the financial industry. The NSCC and DTC play a majorpart in the settlement and clearing of securities transactions. They are the largestproviders of these services worldwide.

National Securities Clearing Corporation (NSCC), established in 1976, is thelargest of the clearing corporations in terms of the transaction volumes itprocesses. In 2004, it processed 5.7 billion transactions valued at $100.4 trillion -or an average of 22.9 million transactions each day, valued at $401.5 billion.NSCC provides clearing, settlement, netting, risk management, centralcounterparty services and a guarantee of completion for all street-side tradesinvolving equities, corporate and municipal debt, American Depository Receipts,exchange-traded funds, unit investment trusts, mutual funds, insurance productsand other securities. Through its netting process, NSCC reduces the value offinancial obligations requiring settlement by as much as 97% each day. NSCCgenerally clears and settles trades on a T+3 basis.

On May 10, 2004, the peak volume trading day in 2004, NSCC processed 30.2million transactions valued at $494.6 billion. After netting the transactions andfinancial obligations by 97%, however, the value of obligations was $12.5 billion.

FICC:Fixed Income Clearing Corporation FICCFICC is an agency that deals with the confirmation, settlement and delivery offixed-income assets in the U.S. The agency ensures the systematic andefficient settlement of U.S. Government securities and mortgage-backed securitytransactions in the market. The FICC started operations at the start of 2003 andwas created when the Government Securities Clearing Corporation and the

Mortgage-Backed Security Clearing Corporation merged. The clearingcorporation is divided into two sections: the government securities division andthe mortgage-backed securities division.

The Government Securities Division clears, nets, settles and manages the riskarising from a broad range of U.S. Government securities transactions for itsmember firms (brokers, dealers, banks and other financial institutions) andhundreds of correspondent firms that clear through these members. Thesetransactions include original auction purchases of Treasury and Freddie Macsecurities, buy/sell and repo transactions in Treasury and Government Agencysecurities, and GCF RepoTM transactions in Treasury and Government Agency

securities as well as certain mortgage-backed securities.The Mortgage-Backed Securities Division operates two primary business units:Clearing services, which include trade comparison, confirmation, netting, and riskmanagement, and Electronic Pool Notification (EPN) services, which allowcustomers to transmit/retrieve mortgage-backed securities pool information inreal-time using standardized message formats. Mortgage-backed securities arebought and sold in the over-the-counter cash, forward and options markets. Thekey participants in these markets - the nation's original secondary markets forloan assets - are mortgage originators, government sponsored enterprises,


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registered broker/dealers, inter-dealer brokers, institutional investors, investmentmanagers, mutual funds, commercial banks, insurance companies and otherfinancial institutions.The Corporate, Municipal, and UITs (CMU) division of FICC provides all of itscustomers with RTTM a single pipeline, a common processing platform, and astandardized message format for the U.S. fixed income markets. RTTM reduces

execution and settlement risk as well as costs because it allows customers tomaximize the volume of trades that match on trade date, and ensures that tradesare locked in and ready for settlement, moments after theyve been submitted. Italso allows firms to fix any processing problems the same day when an erroroccurs, rather than waiting for the following morning, as in the previous batchprocessing system.

OCC:Options Clearing Corporation OCCOCC is a clearing organization that acts as both the issuer and guarantor foroption and futures contracts. The Options Clearing Corporation is regulated by

both the SEC and the CFTC.

The OCC is the largest clearing organization in the world and is owned equallyby the American Stock Exchange (AMEX), Chicago Board Options Exchange(CBOE), International Securities Exchange (ISE), Pacific Exchange, and thePhiladelphia Stock Exchange (PHLX)The Options Clearing Corporation (OCC), founded in 1973, is the world's largestequity derivatives clearing organization. OCC is dedicated to promoting stabilityand financial integrity in the marketplaces that OCC serves by focusing on soundrisk management principles. By acting as guarantor, OCC ensures that theobligations of the contracts OCC clears are fulfilled.

As the marketplace evolves, so do our clearing capabilities. Although OCCbegan as a clearinghouse for listed equity options, OCC has grown into aglobally recognized entity that clears a multitude of diverse and sophisticatedproducts. OCC operates under the jurisdiction of both the Securities andExchange Commission (SEC) and the Commodities Futures TradingCommission (CFTC). Under its SEC jurisdiction, OCC clears transactions for putand call options on common stocks and other equity issues, stock indexes,foreign currencies, interest rate composites and single-stock futures. As aregistered Derivatives Clearing Organization (DCO) under CFTC jurisdiction,OCC offers clearing and settlement services for transactions in futures andoptions on futures.


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Chapter 6 - Corporate Act ions

DividendsDividends are payments made by a company to its shareholders. When acompany earns a profit, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the

shareholders of the company as a dividend. Many companies retain a portion oftheir earnings and pay the remainder to their shareholders. Publicly-tradedcompanies usually pay dividends on a fixed schedule, commonly annually, bi-annually or quarterly; however, they may declare a dividend at any time.Dividends are usually paid in cash. Sometimes dividends instead take the form ofshares in the company (either newly-created shares or existing shares bought inthe market). Exceptionally, dividends might take the form of shares in othercompanies or other assets.

OverviewThe profits of a company can either be reinvested in the business or paid to its

shareholders as a dividend. The frequency of these varies by country. In theUnited States dividends of publicly-traded companies are usually declaredquarterly by the board of directors. In some other countries dividends are paidbiannually, as an interim dividend shortly after the company announces itsinterim results and a final dividend typically following its annual general meeting.In other countries, the board of directors will propose the payment of a dividendto shareholders at the annual meeting who will then vote on the proposal.In the United States, a decision regarding the amount and frequency of dividendsis solely at the discretion of the board of directors. Shareholders are explicitlyforbidden from introducing shareholder resolutions involving specific amounts ofdividends (SEC Form 8-A)

Where a company makes a loss during a year, it may opt to continue payingdividends from the retained earnings from previous years or to suspend thedividend. Where a company receives a non-recurring gain, e.g. from the sale ofsome assets, and has no plans to reinvest the proceeds, the money is oftenreturned to shareholders in the form of a special dividend.

Forms of paymentCash - Cash dividends (most common) are those paid out in form ofrealcash. Such dividends are a form of investment income and are usuallytaxable to the recipient in the year they are paid. This is the most commonmethod of sharing corporate profits with the shareholders of the company.

Action credit cash to clients cash account per period (as stated individend announcement.)Stock - Stock or scrip dividends are those paid out in form of additionalstock shares of the issuing corporation, or other corporation (e.g., itssubsidiary corporation). They are usually issued in proportion to sharesowned (e.g., for every 100 shares of stock owned, 5% stock dividend willyield 5 extra shares). This is very similar to a stock split in that it increasesthe total number of shares while lowering the price of each share and


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does not change the market capitalization or the total value of the sharesheld.Action credit security to clients securities account per period (as statedin dividend announcement.)

Cash and stock In some instances, the dividend can be paid out as a

combination of both cash and stock (in pro-rated amounts per share).Action client is credited cash to cash account and securities (as apercentage per share) to securities account (per period as stated individend announcement.)Cash or stock - Sometimes, the client is presented with the option ofreceiving the dividend in either cash or stock.Action the client is notified of the option (through client informationmanagement) and then sends a reply to the broker. Once the brokerreceives the reply, he then credits the appropriate amount of cash and/orstock into the clients account.

DRIPS - dividend reinvestment plan. A DRIP allows for the automaticreinvestment of shareholder dividends in more shares of Companysstock.Action the clients account is credited cash from the dividend, thensimultaneously debited that amount of cash and credited the pro-ratedportion of securities into his securities account. This transaction is neverpresented to the client, it only occurs on the back-end.

Dates - Dividends must be "declared" (approved) by a companys Board ofDirectors each time they are paid. There are four important dates to rememberregarding dividends. These are discussed in detail with examples at theSecurities and Exchange Commission site

Declaration date - The declaration date is the day the Board of Directorsannounces its intention to pay a dividend. On this day, a liability is created andthe company records that liability on its books; it now owes the money to thestockholders. On the declaration date, the Board will also announce a date ofrecord and a payment date.Ex-dividend date - The ex-dividend date is the day after which all shares boughtand sold no longer come attached with the right to be paid the most recentlydeclared dividend. This is an important date for any company that has manystockholders, including those that trade on exchanges, as it makes reconciliationof who is to be paid the dividend easier. Prior to this date, the stock is said to becum dividend ('with dividend'): existing holders of the stock and anyone who buys

it will receive the dividend, whereas any holders selling the stock lose their rightto the dividend. On and after this date the stock becomes ex dividend: existingholders of the stock will receive the dividend even if they now sell the stock,whereas anyone who now buys the stock now will not receive the dividend.It is relatively common for a stock's price to decrease on the ex-dividend date byan amount roughly equal to the dividend paid. This reflects the decrease in thecompany's assets resulting from the declaration of the dividend. However it mustbe emphasized that there is no direct link between the price and the dividend,this price movement is simply a result of market action.


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Record date - Shareholders who properly registered their ownership on orbefore the date of record will receive the dividend. Shareholders who are notregistered as of this date will not receive the dividend. Registration in mostcountries is essentially automatic for shares purchased before the ex-dividenddate.Payment date - The payment date is the day when the dividend checks will

actually be mailed to the shareholders of a company or credited to brokerageaccounts.

Rights IssueA Rights issue is offered to existing shareholders; that gives them the right topurchase further shares in a given time period at a given price. Right issues areused by companies to raise additional capital.

Action notify client. If client accepts offer, debit clients cash account andcredit securities to clients securities account.

Stock Split

Partitioning the outstanding shares of a corporation into a larger number ofshares, without affecting shareholders' equity or the total market value at the timeof the split. For instance, if a stock valued at $100 splits 2-for-1, an investor whoowns 100 shares would now own 200 shares valued at $50. Splits usually mustbe voted on by directors and approved by shareholders.

Action - debit old securities from clients securities account and credit clientwith new securities.

Exchange OfferAn Exchange offer is an offer by an issuer of debt securities to exchange newsecurities with less onerous provisions for currently outstanding securities.

Companies often make exchange offers in an attempt to avoid bankruptcy.Action notify client. If client accepts, debit old securities from clientssecurities account and credit client with new securities.

MergerA merger occurs when two corporations join together into one, with onecorporation surviving and the other corporation disappearing. The assets andliabilities of the disappearing entity are absorbed into the surviving entity.

Action clients securities account is debited security of acquired companyand credited security of acquiring company.

Reverse Spli tA Reverse split is a procedure whereby a corporation reduces the number ofoutstanding shares. The total market value of the shares remains the same afterthe reverse split; however, a share is worth more. A company, for example,executes a 1 for 2 split. An investor owning 1000 shares will deliver them to theissuer and they will receive half as many new shares--but the shares will havedouble the value of the original shares.

Action - debit old securities from clients securities account and credit clientwith new securities.


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Bonus IssueA Bonus Issue is the issue of new shares to an existing shareholder, but at noextra cost. A bonus issue is a means for the company to distribute historicretained profits to shareholders.

Action credit clients securities account with new securities.

Name ChangesThe renaming of a corporate entity. The result is the re-issuance of thecorporations security in the new name and stock ticker symbol.

Action the client is debited the old security and is credited with the newsecurity in the same amount. This transaction is important as the oldsecurity sticker symbol does not trade on the market after the namechange.


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Chapter 7 - Portfolio Management

Portfolio management is the act of managing a portfolio of cash and securities(stock, bonds, derivatives, etc.) on behalf of a client. As opposed to a wealthmanager (whos primary responsibility is to advise clients on investmentdecisions), a brokers primary responsibility is to carry out the clients orders and

to insure that all the backend debiting/crediting occurs on each of the clientscash and securities accounts. For a broker, portfolio management is themanagement of the actual cash and securities in the clients account. He alsomust insure that cash and securities held by the client are not abused. As anexample, if a client sells a security, the cash from the sale can only be used once(as opposed to falsely selling the same security multiple times and using thecash before the three day settlement period of the reveals the error.)


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Chapter 8 - Front Office Operations

Equity derivatives

Stock options - A contract giving its holder the right to purchase or sell theunderlying security before a certain point in time for a specified amount of money

as outlined by the contract.Call option - A contract that gives the holder the right to buy a specified numberof shares of a particular stock at a predetermined price--called the "strike price"--on or before the option's expiration date. For this right, the holder (buyer) paysthe writer (seller) a premium. The holder profits from the contract if the stock'sprice rises. If the holder decides to exercise the option (as opposed to selling it)the writer of the option must give up ownership of the security.

Action Buy the option - at the purchase point of a call option, the client is debitedcash and credited with the correct number of options contracts. If theoption is executed, the client is further debited cash (per the rate in the

contract) and is credited with securities. If the option is allowed to lapse(expire), no further action is taken on the clients account.Sell the option at the selling point of a call option, the client is creditedcash and debited the option contracts. If the option is executed, the clientis further credited with cash (from the stock sale to the owner of the calloption) and debited the amount of shares (in the contract) from hissecurities account. If the option is allowed to lapse (expire), no furtheraction is taken on the clients account.

Put option - A contract that gives the holder the right to sell a specified number ofshares (usually 100) of a particular stock at a predetermined price--called the"strike price"--on or before the option's expiration date. For this right, the holder

(buyer) pays the writer (seller) a premium. The holder profits from the contract ifthe stock's price drops.

Action Buy the option - at the purchase point of a put option, the client is debitedcash and credited with the correct number of options contracts. If theoption is executed, the client is credited cash (per the rate in the contract)and is debited with securities from his securities account. If the option isallowed to lapse (expire), no further action is taken on the clients account.Sell the option at the selling point of a call option, the client is creditedcash and debited the option contracts. If the option is executed, the clientis debited cash (from the stock purchase from the owner of the put option)

and credited the amount of shares (in the contract) from his securitiesaccount. If the option is allowed to lapse (expire), no further action is takenon the clients account.

Fixed Income derivativesInterest rate swaps An interest rate derivative in which one party exchanges astream of interest for another stream. Interest rate swaps can be fixed-to-floating,fixed-to-fixed or floating-to-floating rate swaps. Interest rate swaps are often used


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by companies to re-allocate their exposure to interest-rate fluctuations, typicallyby exchanging fixed-rate obligations for floating rate obligations.

Action Client is debited one monthly payment and credited another. Forexample, a client has swapped a fixed rate of 6.00% for a floating rate on$1,000,000. Every month, the client is debited $5,000 and credited withthe floating rate for that month multiplied by $1,000,000.

Asset backed securities - a type of bond or note that is based on pools of assets,or collateralized by the cash flows from a specified pool of underlying assets.Assets are pooled to make otherwise minor and uneconomical investmentsworthwhile, while also reducing risk by diversifying the underlying assets. Thesecuritization makes these assets available for investment to a broader set ofinvestors. These asset pools can be made of any type of receivable from thecommon, like credit card payments, auto loans, and mortgages, or esoteric cashflows such as aircraft leases, royalty payments and movie revenue. Typically, thesecuritized assets might be highly illiquid and private in nature.

Action as an investor in the security, the client is initially debited the

principal amount from his account and credited with the physical security.He is then credited with the monthly interest payment to his cash account.If no credit events occur on the security (i.e., bankruptcy default or pre-payment) during the time period, the client is credited with the full principalat expiry. If a credit event does occur to the security, the client is creditedwith a pro-rated portion of whatever cash remains.

ForwardsA Forwards contract is a financial contract which requires a seller to agree todeliver a specified cash commodity to a buyer sometime in the future. All terms ofthe contract are customized, in contrast to futures contracts whose terms are

standardized. Forward contracts are not traded on exchanges.Action Seller the seller of a forwards contract is credited with cash at the time ofthe sale. The contract must also be drafted (as it is unique) and stored inthe clients information management. At the expiry date, he is debited withthe contracted amount of securities (or commodities, et al.)Buyer the buyer of a forwards contract is debited cash from his accountat the time of the sale. The contract must also be drafted (as it is unique)and stored in the clients information management. At the expiry date, heis credited with the contracted amount of securities (or commodities, et al.)

FuturesA futures contract is a form of forward contract, a contract to buy or sell an assetof any kind at a pre-agreed future point in time that has been standardized for awide range of uses. It is traded on a futures exchange. Futures may also differfrom forwards in terms of margin and delivery requirements.

Action Seller the seller of a futures contract is credited with cash at the time ofthe sale. At the expiry date, he is debited with the contracted amount ofsecurities (or commodities, et al.)


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Buyer the buyer of a futures contract is debited cash from his account atthe time of the sale. At the expiry date, he is credited with the contractedamount of securities (or commodities, et al.)


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GLOSSARY

ACCRUED INTEREST:The interest that has accumulated on a bond since the last interest payment upto, but not including, the settlement date.

There are two methods for calculating accrued interest:1. 360-day year method, used for corporate and municipal bonds2. 365-day year method, used for government bondsAccrued interest is added to the contract price of a bond transaction. Essentially,accrued interest has been earned since the last coupon payment - but sincethe bond hasn't expired or the next payment is not yet due, the owner of thebond hasn't officially received the money. If he or she sells the bond, accruedinterest is added to the sale price.

AGENT:1. An individual or firm that places securities transactions for clients.

2. A person licensed by a state to sell insurance.3. A securities salesperson who represents a broker-dealer or issuer whenselling or trying to sell securities to the investing public. Essentially, this is theperson who makes a transaction on behalf of his or her employer or client.

ALL OR NONE:A condition used on a buy or sell order to instruct the broker to fill the ordercompletely or not at all. For example, if you send a AON order to your brokerrequesting 200 shares at $15, the broker will not fill the order unless s/he can getyou the 200 shares at $15. This prevents you from having orders half filled beforethey expire.

AMEX:The third-largest stock exchange by trading volume in the United States. TheAMEX is located in New York City and handles about 10% of all securities tradedin the U.S. The AMEX has now merged with the NASDAQ. It was known as the"curb exchange" until 1921.It used to be a strong competitor to the New York Stock Exchange, but that rolehas since been filled by the Nasdaq. Today, almost all trading on the AMEX is insmall-cap stocks, exchange-traded funds and derivatives.

AT THE CLOSE ORDER:

An order specifying that a trade is to be executed at the close of the market, oras near to the closing price as possible.It's essentially a market order that doesn't get entered until the last minute (orthereabouts) of trading. With this type of order you are not necessarilyguaranteed the closing price but usually something very similar.


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AT THE OPENING ORDER:An order specifying that a trade is to be executed at the opening of the market,otherwise it's canceled. With this type of order you are not necessarilyguaranteed the opening price.

AUTOMATED ORDER ENTRY SYSTEM:

Electronic system which facilitates small order execution by routing such ordersdirectly to the appropriate specialist on the exchange floor, rather than goingthrough a floor broker.

BEAR SPREAD:1. An option strategy seeking maximum profit when the price of the underlyingsecurity declines. The strategy involves the simultaneous purchase and sale ofoptions; puts or calls can be used. A higher strike price is purchased and a lowerstrike price is sold. The options should have the same expiration date.

2. A trading strategy used by futures traders who intend to profit from the decline

in commodity prices while limiting potentially damaging losses. You make moneyif the underlying goes down and lose if the underlying rises in price. A bearspread is created through the simultaneous purchase and sale of two of thesame or closely related futures contracts. This is accomplished in the agriculturalcommodity markets by selling a future and offsetting it by purchasing a similarcontract with an extended delivery date.

BID AND ASKED:The bid is the price at which a market maker is willing to buy a security. Themarket maker will also display an ask price, or the amount and price at which itis willing to sell.

An example of a bid in the market would be $23.53 x 1,000, which means that aninvestor is willing to purchase 1,000 shares at the price of $23.53. If a seller inthe market is willing to sell that amount for that price, then the transaction iscompleted.Market makers are vital to the efficiency and liquidity of themarketplace. By quoting both bid and ask prices on the market, theyalways allow investors to buy or sell a security if they need to.

BULL SPREAD:An option strategy in which maximum profit is attained if the underlying securityrises in price. Either calls or puts can be used. The lower strike price is

purchased and the higher strike price is sold. The options have the sameexpiration date. You make a lot of money if the stock rises. You lose it all if itdoesn't. It's one of those higher risk maneuvers that can cause a lot of anxiety.

CALENDAR SPREAD:An options or futures spread established by simultaneously entering a long andshort position on the same underlying asset but with different delivery months.Sometimes referred to as an interdelivery, intramarket, time or horizontal spread.An example of a calendar spread would be going long on a crude oil futures


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contract with delivery next month and going short on a crude oil futurescontract whose delivery is in six months.

CALL1. The period of time between the opening and closing of some future

markets wherein the prices are established through an auction process.

2. An option contract giving the owner the right (but not the obligation) to buya specified amount of an underlying security at a specified price within aspecified time.

3. In some exchanges, the call period is an important time in which to matchand execute a large number of orders before opening and closing.

4. A call becomes more valuable as the price of the underlying asset (stock)appreciates.

COLLATERALIZED MORTAGE OBLIGATION:A type of mortgage-backed security that creates separate pools of pass-throughrates for different classes of bondholders with varying maturities, called tranches.

The repayments from the pool of pass-through securities are used to retire thebonds in the order specified by the bonds' prospectus. Here is an example how avery simple CMO works: The investors in the CMO are divided up into threeclasses. They are called either class A, B or C investors. Each class differs in theorder they receive principal payments, but receives interest payments as longas it is not completely paid off. Class A investors are paid out first withprepayments and repayments until they are paid off. Then class B investors arepaid off, followed by class C investors. In a situation like this, class A investorsbear most of the prepayment risk, while class C investors bear the least.

CMOs usually offer low returns because they are very low risk and are

sometimes backed by government securities.

COMBINATION:When an investor holds a position in both call and put options on the same asset.There are various types of combination spreads, including straddles andstrangles.

COMMISSION:A service charge assessed by a broker or investment advisor in return forproviding investment advice and/or handling the purchase or sale of a security.Most major, full-service brokerages derive most of their profits from charging

commissions on client transactions. Commissions vary widely from brokerage tobrokerage. The brokerage with the lowest commissions is not necessarily thebest one. Discount brokerages offer no advice, which can prove to betroublesome for many rookie investors. On the other hand, full-servicebrokerages offer a more personalized service, but commissions are much higher.However, there is the potential for a conflict of interest to develop betweenbrokerages that charge commissions and their clients. Because commissioncompensated brokers will not get paid very much if their clients do not conduct


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many transactions, unethical brokers may encourage clients to conduct moretrades than necessary.

COMMON STOCK:A type of security that signifies ownership in a corporation and represents aclaim on part of the corporation's assets and earnings.

There are two main types of stock: common and preferred. Commonstock usually entitles the owner to vote at shareholders' meetings and to receivedividends. Preferred stock generally does not have voting rights, but has a higherclaim on assets and earnings than the common shares. For example, owners ofpreferred stock receive dividends before common shareholders and have priorityin the event that a company goes bankrupt and is liquidated.Also known as "shares" or "equity". A holder of stock (a shareholder) has aclaim to a part of the corporation's assets and earnings. In other words, ashareholder is an owner of a company. Ownership is determined by the numberof shares a person owns relative to the number of outstanding shares. Forexample, if a company has 1,000 shares of stock outstanding and one person

owns 100 shares, that person would own and have claim to 10% of thecompany's assets.Stocks are the foundation of nearly every portfolio. Historically, theyhave outperformed most other investments over the long run.

CREDIT BALANCEIn a margin account, the amount of funds deposited in the customer's accountfollowing the successful execution of a short sale order. The credit balanceamount includes both the proceeds of the short sale itself and the specifiedmargin amount the customer is required to deposit under Regulation T. In thecase of a short sale, an investor essentially borrows equity shares from his or her

brokerage and then sells the shares on the open market, hoping to buy themback off the open market for a lower price at a later date and then return them tothe brokerage, pocketing the excess cash left over.When the shares are first short sold, the investor receives the cash amount of thesale in his or her margin account. This amount, plus the specified margin amountwhich must be deposited by the investor under Reg T, comprises the creditbalance. It must be maintained in the investor's margin account as a form ofassurance that the shares can be repurchased from the market and returned tothe brokerage house.

CREDIT SPREAD:

1. The spread between Treasury securities and non-Treasury securities thatis identical in all respects except for quality rating.

2. An options strategy where a high premium option is sold and a lowpremium option is bought on the same underlying security.

3. For instance, the difference between yields on treasuries and those onsingle A-rated industrial bonds.A company must offer a higher return ontheir bonds because their credit is worse than the government's.

4. Can also be called "credit spread option" or "credit risk option".


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DAY ORDER:Any order to buy or sell a security that automatically expires if not executed onthe day the order is placed. A day order will not be executed if the limit or stoporder prices were not met during the day. A way to increase the life of an order isto order securities on a 'good 'till cancelled' basis, where, as the name implies,the trade will not expire until it is cancelled or until it reaches a maximum time

limit set by the brokerage.

DEBIT BALANCE:In a margin account, money owed by the customer to the broker for fundsadvanced to purchase securities. The debit balance is the amount of funds thecustomer must put into his or her margin account, following the successfulexecution of a security purchase order, in order to properly settle the transaction.When buying on margin, investors borrow funds from their brokerage and thencombine those funds with their own to purchase a greater number of shares thanthey would have been able to purchase with their own funds. The debit amountrecorded by the brokerage in an investor's account represents the cash cost of

the transaction to the investor.

DEBIT SPREAD:Two options with different market prices that an investor trades on the sameunderlying security. The higher priced option is purchased and the lowerpremium option is sold - both at the same time. The higher the debit spread,the greater the initial cash outflow the investor will incur on the transaction. Forexample, assume that there is a investor holding a call option who sells it for$2.50. Immediately following this sale, the investor buys another call option onthe same underlying security for $2.65. The debit spread is $0.15, which resultsin a loss of $15 ($0.15 * 100).

Although there is an initial loss on the transaction, the investor is betting thatthere will be a significant change in the price of the underlying security, makingthe purchased option more valuable in the future.

DELIVERY:The action by which an underlying commodity, security, cash value, or deliveryinstrument covering a contract is tendered and received by the contract holder.Delivery can occur in option, forward, or futures contracts. In most instances, thedelivery of the actual underlying is rare--contracts are typically closed beforesettlement.

DIVIDEND:Distribution of a portion of a company's earnings, decided by the board ofdirectors, to a class of its shareholders. The dividend is most often quoted interms of the dollar amount each share receives (i.e. dividends per share or DPS).It can also be quoted in terms of a percent of the current market price, referred toas dividend yield. Dividends may be in the form of cash, stock or property. Mostsecure and stable companies offer dividends to their stockholders. Their shareprices might not move much, but the dividend attempts to make up for this.In the U.S., dividends face double taxation - the amount comes from after-tax


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income the company generated and the recipients pay taxes on them.As of 2003, cash dividends are taxed at a maximum rate of 15% as long as thestock has been held for at least 60 out of the 120 days beginning 60 days prior tothe ex-dividend date. If you have held the stock for a period of less than this thedividend will be taxed at your regular income level.High-growth companies rarely offer dividends because all their profits are

reinvested to help sustain higher-than-average growth.

DO NOT REDUCE (DNR):A trade type used on an buy or sell order. It tells the broker not to decrease thelimit price on buy-limit and sell-stop orders on the record date of a cash dividend.When a stock goes ex-dividend the price is usually reduced by the amount of thedividend.

ECN:An electronic system that attempts to eliminate the role of a third party in theexecution of orders entered by an exchange market maker or an over-the-

counter market maker, and permits such orders to be entirely or partly executed.An ECN connects major brokerages and individual traders so that they can tradedirectly between themselves without having to go through a middleman.

EX-DIVIDEND DATE:The date on or after which a security is traded without a previously declareddividend or distribution. After the ex-date, a stock is said to trade ex-dividend.This is the date on which the seller, and not the buyer, of a stock will be entitledto a recently anno

pyxis financial training manual version 1.2

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