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, and cash-account payment is due within the Regulation T period.
The whole unit on one sheet: order types, where each order sits, settlement, margin, and the market mechanics the exam loves.
Which One-Liners 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.
- When acting as a market maker, a firm trades as principal, quote two-sided, and profit from the spread, not a commission.
- Introducing broker-dealers do not hold client assets; clearing broker-dealers (custodians) do.
- Exchanges provide price discovery, order matching, and listing standards; they do not hold customer assets. Treasuries, most bonds, and some smaller stocks trade over the counter instead, and Nasdaq is an exchange despite being electronic.
- Payment for order flow (PFOF) is paid by the market maker to the broker, is legal, but must be disclosed with both a public quarterly routing report and, on customer request, that customer's own routing disclosure.
Which Numbers Matter Most?
| Item | Value |
|---|---|
| Regular-way settlement (stocks, bonds, exchange-traded funds, mutual funds, options, government securities) | T+1 |
| Cash-account payment deadline | T+1 plus two business days (Reg T payment period), not merely settlement date |
| Initial margin (Regulation T) | 50% of purchase price, or a higher regulatory-authority percentage, whichever is greater |
| Minimum equity to open a margin account | $2,000 (FINRA rule, not Regulation T; a purchase need not exceed the security's cost) |
| 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) |
Which Gotchas Trip Students Up?
- 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 equity is a FINRA rule, not Regulation T. It does not apply in full to a purchase costing less than $2,000, but it does apply to a small short position regardless of size. The house maintenance requirement can exceed FINRA's 25% minimum.
- A maintenance call unmet lets the firm liquidate securities without the customer's consent, and the customer does not choose which.
- Nonpayment alone in a cash account triggers a mandatory cancel-or-liquidate, not a 90-day freeze. The freeze is reserved for free riding: selling before paying, funded by the sale proceeds.
- 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 while sell limits and buy stops go above. Investors buy at the ask and sell at the bid, and most securities settle T+1. Cash-account payment is due within the Regulation T period, and free riding triggers a 90-day freeze; margin runs on 50% initial, 25% FINRA maintenance, and a $2,000 equity floor waived down to the purchase cost but not for short sales. Commission signals agency, a market maker trades as principal, and best execution means reasonable diligence.
Need more than the recap? Read the full Trading Securities unit.