Equity Products and Trading Mechanics
Key Concepts
- Equity types: Common stock (voting, residual claim), preferred stock (fixed dividends, priority), and variations like convertible preferred.
- Order types: Market, limit, stop, stop-limit; time-in-force (day, GTC, IOC, FOK). Understand execution priority and price improvement.
- Trading mechanics: Bid-ask spread, liquidity, volatility, and market impact. Know the difference between quote-driven and order-driven markets.
- Corporate actions: Dividends, splits, reverse splits, rights offerings, and their effects on price and share count.
- Short selling: Mechanics, margin requirements, and the uptick rule (Rule 201).
Traps
- Confusing stop orders (become market orders) with stop-limit orders (become limit orders).
- Miscalculating the effect of a stock split on market cap (unchanged) vs. share price (adjusted).
- Forgetting that preferred dividends are typically cumulative unless stated otherwise.
Worked Example / Rule of Thumb
Rule of thumb: In a 2-for-1 split, shares double, price halves, market cap unchanged. Example: A stock trades at $100 with 1 million shares (market cap $100M). After a 2-for-1 split, shares = 2 million, price = $50, market cap still $100M.