Understanding Trading, Customer Accounts and Prohibited Activities
Trading, accounts, and conduct
Trading questions test order mechanics. A market order seeks immediate execution at the best available price; a limit buy is placed below the market and a limit sell above it. A stop order becomes a market order when the stop price trades; a stop-limit becomes a limit order, so it may not execute. Time-in-force includes day and GTC. Settlement for most U.S. equities and corporate bonds is T+1. Cash accounts require full payment; margin accounts permit borrowing, with Reg T initial margin generally 50% and FINRA maintenance generally 25%, though firms may require more. Short sales require borrowing shares and margin.
Accounts include individual, joint tenants with right of survivorship (passes to survivor), tenants in common (passes to estate), custodial UTMA/UGMA, trust, corporate, retirement, and 529 plans. Know-your-customer, suitability, and AML obligations apply. Discretion requires written authorization and firm approval. Prohibited conduct includes insider trading, wash trades, matched orders, painting the tape, pump-and-dump, front-running, churning, unauthorized trading, commingling, selling away, guaranteeing against loss, and excessive markups. Regulation Best Interest requires recommendations in the customer's best interest.
Worked example: A customer places a limit buy at $40 while the stock trades at $42. The order will not execute unless the price falls to $40 or lower; it does not execute at $42 simply because it was entered.
Trap: A stop-limit order protects price but risks missing the trade; a stop order protects execution but not price.