Markets and Instruments
23 articles · 38 glossary terms
What is actually being bought and sold — shares, bonds, currencies, commodities and funds — and the machinery of the exchange that matches the two sides.
Foundations
Start here if the subject is new.What a Stock Actually Is
A share is a legal claim on a company's assets and earnings, ranked behind everyone else with a claim. That ordering explains most of how equities behave.
How a Stock Exchange Works
An exchange is a matching engine surrounded by rules. Understanding the order book, the market maker and the auctions explains why liquidity appears and disappears at particular moments.
Order Types, and What Each One Guarantees
A market order fills immediately at the best available price; a limit order fills only at a set price or better. Every order type trades certainty of price against certainty of execution, and none guarantees both.
The Bid-Ask Spread
The bid-ask spread is the gap between the highest bid and the lowest ask. It is the price of immediacy, paid on every round trip, and the most reliable live read on how liquid a stock is.
Market Hours, Premarket and After-Hours
US stocks trade in a regular session from 9:30 a.m. to 4:00 p.m. Eastern, plus premarket and after-hours sessions. The extended sessions run on different rules, thinner books and less reliable prices.
Market Capitalization
Market cap is price multiplied by share count. It is the market's price for the whole equity, and it is the single most useful number for deciding whether two companies are comparable at all.
ETFs, Index Funds and Mutual Funds
A fund is a basket sold as one security. The differences that matter are how it trades, what decides its holdings, and what it charges.
Intermediate
Assumes the foundations above.Float and Shares Outstanding
Float is the number of shares actually available to trade: shares outstanding minus insider and restricted holdings. A small float explains a great deal of unusually fast price movement.
Bonds: Coupon, Par, Price and Yield
A bond is a loan cut into tradable pieces. Its price and its yield move in opposite directions by arithmetic necessity, and that single fact drives most of what happens in fixed income.
The Treasury Yield Curve
The curve plots what the US government pays to borrow across every maturity. Its level, its slope and its changes are the most watched picture in macro.
Foreign Exchange and the Dollar
Currencies are quoted in pairs, so every quote is a ratio between two things that both move. For equity traders the dollar is the pair that matters most.
How Commodities Trade
Commodities trade mostly as futures with delivery dates, which introduces a cost of carry that equities simply do not have.
OTC Markets and the Tiers Beneath the Exchanges
Thousands of securities trade without an exchange listing, under tiers that differ enormously in how much a buyer is entitled to know.
Short Selling, Borrow and Short Interest
Short selling is selling borrowed shares and buying them back later. The borrow, its cost and the disclosure schedule together explain why heavily shorted stocks behave as they do, squeezes included.
Options: Calls, Puts, Strikes and Expiry
An option is a right with a deadline. Because it expires, its value decays with time as well as moving with price, which is what makes it behave unlike a share.
Dilution, Offerings and Reverse Splits
Dilution is the shrinking of existing shareholders' ownership when a company issues new shares. Every new share shrinks the claim of the old ones, and all of it is disclosed, usually before it happens.
ADRs and Foreign Listings
A way of holding a foreign company through a US-listed security. The wrapper introduces a ratio, a fee, a currency exposure and a sponsor.
Circuit Breakers and Halts
A trading halt pauses trading in one stock, for pending news or a volatility band, or in the whole market after a large decline. Halts pause the move rather than prevent it.
Settlement and Clearing
A trade is agreed in an instant and completed a day later. What happens in between involves a clearing house that stands between the two sides.
How an Index Is Built
An index is a set of rules about what to include and how to weight it. Those rules determine what the index measures and produce mechanical flows when they change.
Going Public: IPO, Direct Listing and SPAC
Three routes to a public listing, with different mechanics, different disclosure and different consequences for the shares that arrive on the market.
Advanced
Detail, edge cases and methodology.Short Sale Rules and Restrictions
Short selling is permitted and constrained. The constraints are specific, they change during stress, and they affect what is possible rather than what is advisable.
ECNs, Dark Pools and Market Fragmentation
Trading in a single security happens across dozens of venues. Some display their quotes and some do not, and the consolidated picture is assembled from all of them.
Terms Defined in This Subject
Open one for its definition, and the article that explains it in full.
Frequently Asked Questions
What is the difference between a market order and a limit order?
A market order executes right away at whatever price is available, so it is certain to fill and uncertain in price. A limit order executes only at the stated price or better, so the price is certain and the fill is not. No order type guarantees both, because nobody is obliged to take the other side.
Read the full article: Order Types, and What Each One GuaranteesWhat is the bid-ask spread?
The bid-ask spread is the gap between the highest price a buyer is offering and the lowest price a seller will accept. Buying at the ask and selling at the bid costs the spread on every round trip, so it is the price of immediacy and a live read on how liquid a stock is.
Read the full article: The Bid-Ask SpreadCan stocks trade before the open and after the close?
Yes. US stocks trade in premarket and after-hours sessions outside the regular 9:30 a.m. to 4:00 p.m. Eastern session. Those sessions have thinner order books, wider spreads and different order rules, and an extended-hours price often does not hold once the regular session opens.
Read the full article: Market Hours, Premarket and After-HoursWhat is a stock's float?
Float is the number of shares actually available to trade, which is shares outstanding minus stock held by insiders, affiliates and holders under lockup. A small float means fewer shares change hands between buyers and sellers, so a burst of demand can move the price much further than it would in a widely held stock.
Read the full article: Float and Shares Outstanding