A BENCHMARK is a standard; a set of information used for comparisons. Indexes are often used as benchmarks.
A MARKET INDEX is a weighted average of the specific security prices, industrial production components, or market factors that make up the index.
The DOW JONES INDUSTRIAL AVERAGE is composed of 30 stocks. The Dow accurately measures what it claims to measure: the performance of 30 key companies which are worth about 25% of the total value of all stocks listed on the NYSE. To the extent that those companies represent key sectors of the economy, their performance indicates how the economy is doing. However, other sectors of the economy perform differently.
The NYSE COMPOSITE INDEX includes all stocks traded on the New York Stock Exchange. The NYSE also reports the activity in four sectors - industrial, utility, transportation and financial - in separate indexes.
The STANDARD & POOR’S 500 INDEX incorporates a broad base of 500 of some of the largest U.S. public corporations: 400 industrial, 40 utility, 40 financial and 20 transportation companies.
The NASDAQ COMPOSITE INDEX was created to track the progress of more than 4000 stocks listed on the National Association of Securities Dealers Quotation System.
The AMEX MARKET VALUE INDEX monitors the performance of over 800 companies listed on the American Stock Exchange.
The RUSSELL 2000 represents the smallest two-thirds of the 3,000 largest U.S. companies, including a great many of the initial public offerings of the last few years.
The WILSHIRE 5000, the broadest index, includes all stocks traded OTC and on exchanges, including the S&P 500.
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WHAT IS A TRADE, HOW DOES IT WORK ?
Stocks are generally traded in 100-share increments called ROUND LOTS. Any
number of share fewer than 100 is an ODD LOT.
When you buy or sell a security, the brokerage firm enters your order into its computer system for transmittal to its traders at the designated exchange or the firm’ OTC trading desk. For an exchange-listed security, the order is sent to the BROKERAGE FIRM’S FLOOR BROKER on the exchange or directly to a SPECIALIST in that particular stock, who maintains a post on the exchange floor, to be matched with an offsetting order.
THE SPECIALISTS
Brokers called "SPECIALISTS" play a critical role because they serve as the contact point between brokers with buy and sell orders in the NYSE's two-way auction market.
Each stock listed on the NYSE is allocated to a specialist, a broker who trades only in specific stocks at a designated location. All buying and selling of a stock occurs at that location, called a trading post. Buyers and sellers - represented by the floor brokers - meet openly at the trading post to find the best price for a security. The people who gather around the
specialist's post are referred to as the trading crowd. Bids to buy and offers to sell are made by open outcry to provide interested parties with an opportunity to participate, enhancing the competitive determination of prices. When the highest bid meets the lowest offer, a trade is executed.
To a large degree the specialist is responsible for maintaining the market's fairness, competitiveness and efficiency. Specifically, the specialist performs four vital functions.
One of the specialist's jobs is to execute orders for floor brokers in their assigned stocks. A floor broker may get an order from a customer who only wants to buy a stock at a price lower than the current market price - or sell it at a price higher than the current market price. In such cases, the broker may ask the specialist to hold the order and execute it if and when the price of the stock reaches the level specified by the customer. In this role the specialist acts as an agent for the broker.
In a sense, specialists act as auctioneers for their assigned stocks. At the start of each trading day, the specialists establish a fair market price for each of their stocks. The specialists base that price on the supply and demand for the stock. Then, during the day, the specialists quote the current bids and offers in their stocks to other brokers. Investors may direct
brokers to place stock orders contingent on a variety of conditions. The most common are: MARKET ORDER and LIMIT ORDER.
MARKET ORDERS are executed immediately. A LIMIT ORDER is an open order to buy or sell at a specified price or better. When your trade is executed, the brokerage firm sends you a confirm, a written confirmation that reports the trade date (date the order takes effect,
you are the legal owner), the quantity, the description, and the price.
When securities are purchased, payment must be made on or before the SETTLEMENT DATE. Settlement for stock generally occurs on the third business day following the trade date.
Commissions and Markups. Transaction costs for buying and selling stock are based on the share price and number of shares traded during a single market session. Stock commissions are typically a fraction of 1 percent to 3 percent. The higher the stock price and the greater the number of shares traded, the lower the commission.
Securities Settlement
SECURITIES SETTLEMENT is the final point in the trading process at which securities are delivered and money is exchanged.
Delivery vs. Payment
Delivery vs. Payment involves any settlement where securities are delivered and cash is received concurrently. DVP describes the seller's perspective.
Clearing House Funds vs. Same Day Funds
Depending upon how payment is made to settle a trade in the United States, use of clearing house funds or same day funds will determine the availability of cash associated with a trade. CLEARING HOUSE FUNDS are available to spend one day after actual settlement date. Almost all DTC trades settle in clearing house funds, the exception being commercial paper which settles in same day funds. SAME DAY FUNDS are available to spend on the same day as actual settlement date. Same day funds are sometimes referred to as Fed funds.
Free Delivery
Free Delivery or Delivery Free of Payment involves security transfers where there is no corresponding cash movement. Securities transferred from a previous custodian or trustee to a newly hired custodian or trustee are examples of free delivery settlements.
Book Entry vs. Physical
BOOK ENTRY is an electronic system that records transfers of securities and/or cash between a buyer and a seller. Most DEPOSITORIES operate in a book entry environment. For securities that settle through book entry, physical certificates may or may not exist. If physical certificates do exist, however, a major advantage to book entry is that these certificates do not have to physically move in order to settle the trade. Another major advantage to book entry is that registration in the name of the new owner is usually effective immediately upon settlement. In the United States, book entry settlement locations include DTC, the Fed, and PTC. In contrast, PHYSICAL SETTLEMENT requires that paper certificates
change hands. Disadvantages to physical settlement include the increased risk that certificates could become lost, the time delay associated with re- registration because new certificates must be issued, and the time required to make physical delivery itself. Physical
certificates are generally held in a vault by the appropriate bank or broker.
Trade Date
TRADE DATE refers to the date upon which a buyer and seller agree to the terms of a security purchase or sale, including the price, the amount of shares, and the date, location, and method of exchanging the cash and the securities. By agreeing to the trade, both buyer and seller have entered into a mutually binding contract regarding the exchange of securities and cash.
Contractual Settlement Date
CONTRACTUAL SETTLEMENT DATE is the date upon which a trade is expected to settle, according to the terms of the trade agreement.
Actual Settlement Date
ACTUAL SETTLEMENT DATE refers to the date upon which the trade actually settles. Actual settlement can occur on or after contractual settlement date. Although the contractual settlement date is agreed to on trade date, a trade may not settle until sometime later, due to an error or problem with delivery of the security.
Failed Trades
A FAILED trade occurs when a trade does not settle on the contractual settlement date due to either inaccurate delivery or non-delivery of the security by the seller. Trades that are open after the contractual settlement date are said to be "failing", as they have "failed to settle" on time. Failed trades can cause subsequent problems with income collection and
corporate actions, as the new owner is unable to register the security until settlement has occurred. A failed buy can also cause problems if the purchaser wishes to sell the security but is unable to make delivery on the sell since the purchase has not yet settled.
DK (Don't Know)
In some cases, the receiving party does not accept an attempted delivery of securities for settlement. This may occur when there is a mismatch in the information connected with the delivery, such as the name of the security, the amount of shares or par, the price, the
contractual settlement date, the broker, etc. It may also occur if the receiving party has no instructions regarding the trade whatsoever. The receiving party refuses to accept delivery, saying that they "DON'T KNOW" this trade as delivered. The expression "DK" is short for "don't know", thus, the receiver is said to "DK" the trade. Errors which could cause a mismatch in information may have occurred in either the buyer's or seller's instructions to their respective agents. Both parties usually reconfirm their information and changes are made as necessary in order to effect good delivery.
Market Conventions
Depending upon the type of security traded and the market in which the trade occurs, the period between Trade Date and Contractual Settlement Date will vary. The scheduled contractual settlement date is usually denoted as TRADE DATE + (number of days), or TD + (number of days), or T + (number of days). The following describes examples of settlement variations within different markets as of this writing.
United States
In the United States, LONG TERM DEBT and EQUITY SECURITIES are
scheduled for Trade Date + 5 settlement. Settlement dates for COMMERCIAL SHORT TERM DEBT (MONEY MARKET INSTRUMENTS) can be negotiated at the time of the trade, but
due to the nature of these investments, most are traded to settle either on Trade Date or Trade Date + 1.
SHORT TERM TREASURY securities on the secondary market are generally traded for settlement on T + 1. Some trades can be negotiated for same day settlement, however the interest rate agreed to may be lower than if the trade is made for next day settlement. Treasury securities bought at Monday Treasury auctions (primary market purchases) usually settle on T + 3.
Canada
The Canadian Depository for Securities (CDS) settles trades executed on the Toronto and Montreal Exchanges through their Securities Settlement Service (SSS). Although owned by the depository, SSS is used to settle both depository and non-depository trades. SSS operates both a book entry system and a physical settlement system. Depository eligible
securities settle by book entry through the Book Based System (BBS). Depository ineligible securities with valid CUSIP numbers are settled physically through the Certificate Based System (CBS). Ineligible securities without valid CUSIP numbers cannot be settled through SSS, and must settle physically, at the office of the buyer's broker or custodian.
Denmark
All settlements in Denmark occur on T + 3.
Italy
Formal settlement practices in Italy apply only to trades executed on one of the official stock exchanges. Whether a trade is contracted to settle on the forward or cash market determines how quickly it will settle. Trades executed on the FORWARD MARKET have a settlement period of up to T + 45. Trades made during the last two weeks of a month and the first two weeks of the following month settle during the last half of that second
month. Trades executed on the CASH MARKET settle T + 3. The transaction costs for cash market trades are slightly higher, as the costs reflect the settlement of those trades within a shorter period of time.
Korea
In Korea, equities and convertible bonds settle on T + 2. Trading and settlement activity take place on Saturdays, since Saturday is a working day in Korea.
Sri Lanka
All settlements in Sri Lanka occur on T + 7.
United Kingdom
In the United Kingdom, trades are processed for settlement every fourteen days. The fourteen day schedule is maintained unless the scheduled settlement date falls on a holiday, then the whole cycle is moved forward to be begun again on the next open business day. Thus, settlements may occur on Mondays for a while, then be pushed forward to Tuesdays, etc. An attempt is made to settle failed trades within the next few days. Trades are always settled through physical delivery.
Corporate actions.
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