Quick Answer
A market order guarantees execution, not price; a limit order guarantees price, not execution. A stop becomes a market order at its trigger; a stop-limit becomes a limit order. Buy limits and sell stops sit below the market; sell limits and buy stops sit above. Most securities settle T+1.
The whole unit on one sheet: order types, where each order sits, settlement, margin, and the market mechanics the exam loves.
The One-Liners That Win Points
- Market order guarantees execution but not price; it is the default when none is specified.
- Limit order guarantees price but not execution; "better" means lower for buy limits, higher for sell limits.
- Stop order becomes a market order at the trigger and can slip in fast markets.
- Stop-limit becomes a limit order after the trigger: price protected, but may not fill if the market gaps through.
- Short sale = borrowing and selling shares you do not own; profit when the price falls, loss potential is unlimited.
- Short sales require a margin account; a cash account cannot hold a short position at all.
- Bid = highest price a buyer pays; ask (offer) = lowest price a seller accepts; the spread is the dealer's compensation.
- Investors buy at the ask (higher) and sell at the bid (lower); the dealer does the opposite.
- Commission = agency (broker) capacity; markup/markdown = principal (dealer) capacity. Compensation reveals capacity.
- Market makers always trade as principal, quote two-sided, and profit from the spread, never a commission.
- Introducing broker-dealers do not hold client assets; clearing broker-dealers (custodians) do.
- Payment for order flow (PFOF) is paid by the market maker to the broker, is legal, but must be disclosed.
Numbers to Lock In
| Item | Value |
|---|---|
| Regular-way settlement (stocks, bonds, exchange-traded funds, mutual funds, options, government securities) | T+1 |
| Initial margin (Regulation T) | 50% of purchase price |
| Minimum equity to open a margin account | $2,000 |
| Minimum maintenance margin (FINRA rule, long positions) | 25% equity |
| Free-riding penalty (selling before paying) | 90-day account freeze |
| Financial Industry Regulatory Authority (FINRA) markup guideline | 5% (guideline, not a hard cap) |
Top Gotchas
- Buy limits and sell stops are placed below the market; sell limits and buy stops are placed above. The exam tests which side each order sits on.
- Market vs. limit is a trade-off: market buys speed at the cost of price certainty; limit buys price certainty at the cost of a guaranteed fill.
- Buying $10,000 of stock on 50% margin needs only $5,000 cash; deposit $10,000 and buying power is $20,000. Margin amplifies gains and losses.
- The $2,000 minimum applies regardless of position size, and the house maintenance requirement can exceed FINRA's 25%.
- A maintenance call unmet lets the firm liquidate any securities without the customer choosing which.
- Riskless principal is still a principal trade (markup applies) even with no inventory risk.
- FINRA's 5% markup figure is a guideline, not an absolute cap; reasonableness turns on all the facts.
- PFOF does not automatically violate best execution, but a firm must never let it override the duty of reasonable diligence to find the most favorable price. Best execution never means the single best price on every trade.
One-Breath Recap
A market order guarantees execution but not price, a limit order guarantees price but not execution, a stop becomes a market order at its trigger, and a stop-limit becomes a limit order that may gap through. Buy limits and sell stops go below the market; sell limits and buy stops go above. Investors buy at the ask and sell at the bid, paying the spread on every round trip. Most securities settle T+1; margin runs on 50% initial (Regulation T), 25% maintenance (FINRA), and a $2,000 floor, with short sales confined to margin accounts. Commission signals agency, markup or markdown signals principal, market makers always trade as principal, and best execution means reasonable diligence, not a guaranteed best price.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Trading Securities unit for the complete lesson.