Series 7 Exam Prep 97, Trading and Settlement Exam Traps

0:00We are tackling some of the trickiest trading and settlement concepts you'll face on the Series 7 exam, focusing on the traps that can cost you points. First up is the classic confusion between stop and stop limit orders. A sell stop order is placed below the current market price to limit a loss on a long position. Once the stock trades at or through the stop price, it becomes a market order and will be executed immediately at the next available price. The trap here is that execution is guaranteed, but the price is not, which can be disastrous in a fast moving market. In contrast, a sell stop limit order also triggers at or below the stop price, but then it becomes a limit order. This means it will only execute at the limit price or higher. The exam will test this with a scenario where a stock gaps down. The stop order executes at a poor price, while the stop limit order might not execute at all if the price immediately drops below the limit.

1:02Remember this mental shortcut. Stop orders trigger a market order for guaranteed execution, while stop limit orders trigger a limit order for a guaranteed price. Next, let's discuss short sale marking. Every sell order must be marked either long or short. For a short sale, regulation SHO requires the broker dealer to have a reasonable belief that the security can be borrowed and delivered on the settlement date. This is the locate requirement, and it must be done before the short sale is executed. The common exam trap is a question asking what a firm must do before accepting a short sale order. The answer is they must locate the shares. Now, let's connect trading to dividends. The X dividend date is the first day a stock trades without its upcoming dividend. It's typically set one business day before the record date. To receive the dividend, you must purchase the stock before the X dividend date. The exam loves to give you all four dividend dates, declaration, record, X dividend,

2:05and payable, and ask who gets the dividend based on a specific trade date. Always focus on the trade date relative to the X date. If a trade is executed before the X date, but for some reason settles after the record date, the seller still receives the dividend from the issuer but owes it to the buyer. This creates an obligation that is settled using a due bill, which is an instrument confirming the seller's duty to form the dividend to the buyer. On the topic of settlement, remember that the standard for corporate securities, including stocks and bonds, is now T plus 1, or the next business day after the trade date. The same T plus 1 settlement applies to municipal securities. Options contracts also settle in one business day. When a counselor transferred between firms using the ACAT system, the carrying firm has one business day to validate the transfer instruction and three business days to complete the transfer of assets. An exam question might ask about the timeline or what happens if the carrying firm finds

3:06an issue. They must take exception to the transfer within that initial one day period. Finally, let's cover best execution and special instructions. The rule of best execution requires a firm to use reasonable diligence to get the most favorable terms for a customer, considering factors like price, speed, and likelihood of execution. This doesn't just mean the best price. Certain orders require explicit customer instructions, and not held. Order gives the representative time and price discretion for that day only. The exam trap is to confuse this with a discretionary order. A not held order is limited to the day it is entered. If it's to be good for more than one day, it requires written discretionary authority from the customer. For free practice questions, AI-powered explanations, and more exam prep tools, visit openexamprep.com. That's OpenExamprepall1word.com