Trading, Markets & Economy: SIE Glossary Terms

By Reviewed by Michael Carter Updated

Verified against current FINRA & SEC rules.

Price ladder with an order ticket and bell, representing trading glossary terms

These 20 terms cover how trades happen and the economic forces behind prices. The pair to learn first is the market order against the limit order (one guarantees execution, the other guarantees price, and neither guarantees both) followed by the bid-ask spread, the gap every quote question turns on. The economy terms at the end look like a different subject, but the exam treats them the same way: direction-of-effect questions with one right arrow.

Market Order

A market order instructs the firm to buy or sell a security immediately at the best price available: execution is guaranteed, but the price is not.

The SIE® tests market orders mainly by contrast with limit orders, which reverse the trade-off: a limit order guarantees price but not execution. When a question says an investor must be certain the trade happens (selling a position before the market closes, or buying ahead of an announcement) the answer is a market order. Expect a distractor suggesting a limit order priced “just below the market” to save a few cents; that order can go unfilled, and certainty of execution was the whole point.

Two mechanics matter. A market buy fills at the ask and a market sell fills at the bid, the two sides of the bid-ask spread. And in a fast-moving market, the fill can be worse than the quote you saw when you entered the order, because the order takes whatever price is available when it arrives.

Example: a stock is quoted 24.95 bid, 25.05 ask. A market order to buy 100 shares executes right away at about $25.05, roughly $2,505 before costs. If the stock is climbing quickly, the fill might come back at $25.20 instead. Either way the order executes. Only the price floats.

Practice it: order types practice questions

Limit Order

A limit order executes only at its limit price or better (a buy limit fills at the limit or lower, a sell limit at the limit or higher) and it may never execute at all.

The SIE® leans on two details. First, “or better”: a buy limit at $50 can fill at $49.90, never at $50.10. Second, no guaranteed fill: even if the stock trades exactly at the limit price, the order may go unfilled because other orders at that price were entered first and sit ahead of it in line. That is the opposite trade-off from a market order, which guarantees execution but not price.

Timing is also testable. A limit order is a day order by default. If it has not filled by the close, it is canceled. Marked good-til-canceled (GTC), it stays working day after day until it executes or is canceled by the customer or the firm.

Example: with a stock at $50.40, an investor enters a GTC order to buy 100 shares at $50. The stock later prints a trade at exactly $50.00, but the investor’s order does not fill. Orders ahead of it absorbed the available stock at that price. Days later the stock drops to $49.85 and the order executes there: $50 or better, as promised. Had it been a day order, it would have expired at the first close.

Practice it: order types practice questions

Stop Order

A stop order is dormant until the stock trades at or through the stop price; at that moment it is triggered and becomes a market order, filling at the next available price.

The SIE® tests three things here. First, placement: a sell stop goes below the current market to protect a long position from a decline. Second, the mirror image: a buy stop goes above the market to protect a short sale from a rally. Third, price sequences: the trigger and the fill are two different trades, and the stop price is a tripwire, not a guaranteed execution price.

Example: an investor is long at $50 and enters a sell stop at $45. The stock then prints 45.75, 44.90, 45.10, 44.60. The first trade at or through the stop is 44.90. That triggers the order. It is now a market order, so it fills on the next trade, at 45.10. Notice the fill can land above or below the stop price; the exam likes sequences where students wrongly pick the triggering trade as the execution price.

Because the triggered order is a market order, execution is certain but the price is not, the trade-off a stop-limit order reverses.

Practice it: order types practice questions

Stop-Limit Order

A stop-limit order waits at a stop price like any stop order, but once triggered it becomes a limit order rather than a market order.

The SIE® pairs this against the plain stop order, and the contrast is the whole question. A plain stop guarantees execution after the trigger but not the price. A stop-limit guarantees the price but not execution: in a fast or gapping market, the order can go unexecuted entirely, leaving the investor holding a position the stop was supposed to protect. That is the classic trap answer: students pick the stop-limit for “more control” when the scenario clearly calls for certainty of exit.

Example: an investor long at $52 enters a sell stop-limit order, $45 stop, $45 limit. Bad news hits overnight and the stock gaps from a $46.50 close to open at $43.00. The opening trade at $43.00 is through the stop price, so the order triggers; but it is now a limit order to sell at $45 or higher, and no buyer is paying $45. The stock slides to $38 and the order never fills. A plain sell stop at $45 would have sold near $43 at the open: a worse price than hoped, but out.

The takeaway the exam rewards: use a stop-limit only when missing the exit is acceptable; use a plain stop when getting out matters more than the price.

Practice it: order types practice questions

Bid-Ask Spread

The bid-ask spread is the difference between the highest price buyers are willing to pay for a security (the bid) and the lowest price sellers are willing to accept (the ask, or offer).

Orientation comes first: customers buy at the ask and sell at the bid. The dealer quoting those prices takes the other side of each trade, so the spread is the dealer’s compensation. A narrow spread signals an actively traded, liquid stock; a wide spread signals thin trading and higher cost to get in and out.

The SIE® tests this two ways: reading a single quote, and building the inside market from several market maker quotes. The inside market is the highest bid paired with the lowest ask across all quotes, the best available price on each side.

Example: three market makers quote the same stock:

  • Firm A: 19.85 – 20.15
  • Firm B: 19.90 – 20.05
  • Firm C: 19.95 – 20.10

The highest bid is 19.95 (Firm C) and the lowest ask is 20.05 (Firm B), so the inside market is 19.95 – 20.05 and the spread is $0.10. A customer’s market order to buy fills at $20.05; a market order to sell fills at $19.95. Exam questions often list the quotes out of order: sort for the highest bid and lowest ask before computing the spread.

Practice it: quotes and bid-ask practice questions

Market Maker

A market maker is a dealer that publishes continuous two-sided quotes, a firm bid and a firm ask, and stands ready to buy or sell the security from its own inventory at those prices.

On the SIE®, the market maker is the liquidity provider, especially in over-the-counter (OTC) stocks. The contrast to know: a broker routes a customer’s order to someone else and commits no capital, while a market maker commits its own capital, taking the other side of trades itself. Because it trades from inventory, a market maker deals in a principal capacity, and its compensation comes from the bid-ask spread: buying at its bid, selling at its ask. Quotes are firm: the market maker must honor its published price for at least the quoted size.

Example: a market maker quotes a thinly traded OTC stock at 9.80 bid, 10.00 ask. An investor who wants out sells 100 shares to the market maker at $9.80; later, another investor buys 100 shares from its inventory at $10.00. The market maker earned the $0.20-per-share spread, $20, for standing ready on both sides. Without it, those two investors might have waited hours or days for the other side of the trade to appear.

Exam questions often describe the role without naming it (“a dealer that maintains continuous quotes and trades for its own account”) and ask you to identify the market maker.

Practice it: market structure practice questions

Principal Capacity

A firm acts in a principal capacity when it fills a customer’s order from its own account, selling the customer securities out of inventory, or buying the customer’s securities into inventory.

The compensation rule is the tested part. A principal is paid through the price itself: a markup when the customer buys, a markdown when the customer sells. It is never paid a commission on the same trade. Charging both a markup and a commission on one trade is a violation. The capacity the firm acted in must be disclosed on the trade confirmation.

The SIE® drills this as one half of a pairing: dealer, principal, markup/markdown on one side; broker, agent, commission on the other, see agency capacity. Questions describe a trade and ask which capacity the firm acted in, or which form of compensation is permitted. A useful anchor: every trade a market maker does with a customer from its inventory is a principal trade.

Example: the inside ask for a stock is $20.00. A dealer sells a customer 100 shares from its own inventory at $20.50. The $0.50-per-share markup, $50 total, is the dealer’s entire compensation, built into the price, and the confirmation discloses that the firm acted as principal. If the same firm had instead charged $20.50 plus a $25 commission, that would be the violation the exam wants you to spot.

Practice it: trading capacity practice questions

Agency Capacity

A firm acts in an agency capacity when it stands between buyer and seller as a broker, arranging the trade with the other side of the market rather than filling it from its own account.

The compensation rule carries the exam weight. An agent is paid a commission, stated separately and disclosed on the trade confirmation, along with the capacity the firm acted in. The SIE® drills the pairing relentlessly: broker, agent, commission on one side; dealer, principal, markup or markdown on the other, see principal capacity. If a question shows a firm charging a commission, the firm acted as an agent; if the compensation is built into the price, it acted as principal. Charging both on a single trade is a violation.

The economic difference matters too. An agent commits no capital and takes no inventory risk. It simply matches the customer with another party, often a market maker or another investor on an exchange. That is why the same firm can be a broker on one trade and a dealer on the next; capacity is decided trade by trade, not once for all time.

Example: a customer enters a market order to buy 100 shares. The firm routes it to an exchange, where it executes against another investor’s sell order at $40.00. The confirmation shows $4,000 for the stock plus a $25 commission, and states the firm acted as agent.

Practice it: trading capacity practice questions

Short Sale

A short sale is the sale of borrowed shares, made in the expectation of buying them back later at a lower price and returning them to the lender: profit comes from the decline.

Three facts do the testing on the SIE®. First, risk: a short seller’s loss potential is unlimited, because there is no ceiling on how high a stock can climb; the maximum gain is the sale proceeds, reached only if the stock goes to zero. Second, the account: short sales must be done in a margin account, never a cash account, because the position involves borrowed shares. Third, Regulation SHO: before accepting a short sale order, the firm must locate shares that can be borrowed and delivered, no locate, no order.

Example: an investor shorts 100 shares at $50, receiving $5,000 in proceeds. If the stock falls to $40, buying back costs $4,000 and the gain is $1,000. If it instead rises to $75, covering costs $7,500 (a $2,500 loss) and nothing stops it from going higher still. That asymmetry is why short sellers often enter a buy stop order above the market: a buy stop at $55 would trigger on the way up and cap the damage near $500.

When an exam question mentions unlimited risk, borrowed shares, or a locate requirement, it is pointing at a short sale.

Practice it: long and short positions practice questions

Secondary Market

The secondary market is where investors buy and sell securities from one another: the issuing company receives none of the proceeds.

That one feature does most of the work on the SIE®. In the primary market, sale proceeds go to the issuer; in the secondary market, they go to the selling investor. The regulatory pairing follows the same line: the Securities Act of 1933 governs new issues and prospectuses, while the Securities Exchange Act of 1934 governs secondary-market trading and created the SEC.

The exam also breaks secondary trading into venues. The first market is exchange trading, run as an auction with orders competing at a central point. The second market is the over-the-counter (OTC) market, a negotiated dealer network. The third market is exchange-listed stock traded over the counter, and the fourth market is direct institution-to-institution trading, including dark pools, where large block trades execute without displayed quotes.

Example: an investor sells 500 shares of a listed stock at $40.00 on the NYSE. The buyer pays $20,000, the seller collects it (less any commission), and the issuer’s finances do not change at all. Compare that with a firm-commitment underwriting, where the issuer is the one being paid.

Practice it: market structure practice questions

Over-the-Counter (OTC) Market

The over-the-counter (OTC) market is a decentralized network of broker-dealers who trade securities directly with one another at negotiated prices, with no central exchange floor.

The core contrast the SIE® draws: exchanges are auction markets, where buy and sell orders compete at one point and price discovery is centralized; the OTC market is a negotiated market, where dealers quote prices and each trade is a bargain struck between two parties. One fact settles a surprising number of questions. Most outstanding corporate bonds and almost all municipal bonds trade over the counter, not on exchanges. Unlisted equities, quoted through OTC quotation systems, trade here as well.

OTC dealers act as market makers: each stands ready to buy at its bid and sell at its ask, earning the spread between them as compensation for taking the other side.

Example: a dealer quotes a corporate bond at 98.50 bid, 99.00 ask. An investor selling one bond receives $985.00; an investor buying pays $990.00. The half-point spread is the dealer’s compensation for making a market in a bond no exchange lists.

The OTC market is one venue within the broader secondary market (the exam sometimes calls it the second market) and trades executed here still settle regular way, T+1.

Practice it: market structure practice questions

Regular-Way Settlement

Regular-way settlement is the standard timetable for completing a securities trade: ownership and payment change hands one business day after the trade date, written T+1.

Under T+1, stocks, corporate bonds, municipal bonds, and U.S. Treasuries all settle the next business day. Cash settlement is the exception worth memorizing. A trade done for cash settles the same day it is executed.

The SIE® uses the settlement date as an anchor for other calculations, which is why this term matters beyond its own definition. Accrued interest on a bond trade is counted up to but not including the settlement date. The ex-dividend date now falls on the record date itself, because a T+1 trade made the day before record settles in time. And Reg T payment in a margin or cash account is due two business days after settlement (S+2).

Example: you buy a corporate bond on Tuesday. Regular way, the trade settles Wednesday, and the seller is owed accrued interest through Tuesday, every day up to, but not including, Wednesday. Buy on a Friday and settlement lands Monday, since only business days count.

Regular-way settlement applies across the secondary market, whether the trade executed on an exchange or in the OTC market.

Practice it: settlement practice questions

T+1 Settlement

T+1 settlement means a securities trade completes, with ownership and payment changing hands, one business day after the trade date.

The SIE® treats T+1 as the regular-way settlement standard for stocks, corporate bonds, municipal bonds, and U.S. Treasuries. The U.S. moved from T+2 to T+1 on May 28, 2024 under the SEC’s settlement-cycle rule change, so any prep material still teaching T+2 for stocks is stale. Cash settlement is the exception worth memorizing: a trade done for cash settles the same day it is executed.

The exam mostly tests T+1 through its knock-on effects. The ex-dividend date now generally falls on the record date itself, because a T+1 trade made the day before record settles in time. Accrued interest on a bond trade counts up to but not including the settlement date. And Reg T payment in a cash or margin account is due two business days after settlement (S+2).

Example: you buy a stock on Tuesday; it settles Wednesday. Buy on Friday and settlement lands Monday, because only business days count. Sell for cash settlement instead and the trade completes the same day.

Practice it: settlement practice questions

Stock Split

A stock split changes a company’s share count and share price in proportion, leaving the total value of every shareholder’s position, and their total cost basis, exactly where it was.

The SIE® tests splits as arithmetic plus one concept: no one gets richer. A forward split multiplies shares and divides the price; a reverse split does the opposite. Total position value is unchanged, total cost basis is unchanged, and there is no tax event; only the per-share figures adjust.

Forward example: you own 200 shares at $90.00, an $18,000 position with a $60.00-per-share cost basis. After a 2-for-1 split you own 400 shares at $45.00 (still $18,000) and your cost basis becomes $30.00 per share, same total.

The reverse split shows up in one classic scenario: a stock trading below an exchange’s minimum listing price. A company whose stock trades at $0.60 declares a 1-for-10 reverse split; a holder of 1,000 shares now owns 100 shares at $6.00. The position is still worth $600, but the higher share price cures the sub-$1 listing problem.

After either kind of split, the shares simply keep trading in the secondary market at the adjusted price, and trades settle regular way like any other.

Practice it: corporate actions practice questions

Firm-Commitment Underwriting

In a firm-commitment underwriting, the syndicate buys the entire new issue from the issuer as principal and resells it to the public: any shares that fail to sell are the underwriters’ loss, not the issuer’s.

The SIE® tests this term by capacity and by who holds the risk. Firm commitment: underwriters act as principal and bear the full risk of unsold shares. Best efforts: underwriters act as agent, selling what they can and returning the rest, so the issuer bears the risk. All-or-none: the offering is canceled unless every share sells. Standby: a firm commitment to purchase whatever shareholders do not take in a rights offering. And selling-group members, firms invited to help distribute shares, sell as agents with no financial liability for unsold stock.

Example: an issuer sells 5 million shares to the syndicate at $18.60 while the public offering price is $20.00, a spread of $1.40 per share. The issuer collects its full $93 million at once. If only 4 million shares find buyers, the syndicate owns the remaining million and absorbs any loss on them.

This is primary-market activity: proceeds flow to the issuer, the defining opposite of the secondary market, where investors trade with each other and the issuer receives nothing.

Practice it: offerings practice questions

Monetary Policy

Monetary policy is the Federal Reserve’s control of the money supply and short-term interest rates in pursuit of stable prices and full employment.

The SIE® wants three tools, ranked by use. Open-market operations, the Federal Open Market Committee buying and selling Treasury securities, is the tool used most often and most flexibly. The discount rate is the rate the Fed charges banks that borrow from it directly. Changing reserve requirements, the share of deposits banks must hold back, is the most drastic tool and the one used least. The direction is mechanical: when the Fed buys securities it injects reserves into the banking system, easing credit and pushing rates down; when it sells, it drains reserves and tightens.

The standard trap answer is fiscal policy, taxation and government spending, which belong to Congress and the President, not the Fed. If a question mentions tax cuts or spending programs, it is not describing monetary policy.

Example: to fight rising inflation, the Fed sells $40 billion of Treasuries. Bank reserves fall, short-term rates rise, and borrowing slows. Because these tools work on short-term rates, Fed action moves the short end of the yield curve first.

Practice it: economic factors practice questions

Yield Curve

The yield curve is a graph of yields on bonds of the same credit quality, normally U.S. Treasuries, plotted from the shortest maturity to the longest.

Shape is what the SIE® tests. A normal curve slopes upward: long-term yields sit above short-term yields, because lenders demand more for tying up money longer. An inverted curve flips that: short-term yields above long-term. And the exam treats it as the classic recession warning. A flat curve, with short and long yields nearly equal, usually marks the transition between the two.

Example: the 3-month Treasury bill yields 5.10% while the 10-year note yields 4.25%. Short above long means the curve is inverted, and the expected answer is that a contraction may be ahead. The follow-up question is positioning: anticipating that phase of the business cycle, investors rotate toward defensive sectors (utilities, food, and healthcare) whose earnings hold up when the economy slows.

It also helps to know which end moves and why. The short end responds mainly to monetary policy, since the Fed’s tools work on short-term rates; the long end reflects the market’s expectations for growth and inflation years out.

Practice it: economic factors practice questions

Business Cycle

The business cycle is the economy’s recurring sequence of four phases: expansion, peak, contraction, and trough.

The SIE® tests the order of those phases, one definition, and two matching exercises. The definition: a recession is two consecutive quarters of declining GDP. A contraction that is severe and prolonged is a depression, but “two down quarters” is the recession line to know.

Matching exercise one is indicators. Leading indicators (stock prices, building permits, initial unemployment claims) move before the economy turns. Lagging indicators (the average duration of unemployment, the prime rate) confirm a turn after it happens. Coincident indicators, such as personal income and nonfarm payrolls, move with the cycle in real time.

Matching exercise two is stocks. Cyclical companies (automakers, homebuilders, capital-goods producers) rise and fall with the cycle. Defensive companies (utilities, food, pharmaceuticals) hold up in a contraction because people keep buying what they sell.

Example: real GDP falls 0.8% in the first quarter and 0.4% in the second. Two consecutive down quarters means the economy is in recession, defensive stocks are the expected outperformers, and inflation typically cools. An inverted yield curve often flashed the warning before the downturn arrived.

Practice it: economic factors practice questions

Inflation

Inflation is a sustained rise in the general level of prices, which shrinks the purchasing power of every dollar.

Start with the measurement, because the SIE® plants a trap there: inflation is measured by the Consumer Price Index (CPI). GDP measures the economy’s total output, not prices: it is the standard wrong answer. From there, the chain reaction: rising inflation pushes interest rates up, and rising rates push bond prices down. Fixed-income investors are hurt most, and long-maturity bonds fall hardest.

Two variants round out the vocabulary. Deflation is a sustained fall in prices. Stagflation is the unpleasant combination of rising prices with stagnant growth and high unemployment, inflation without the expansion that usually accompanies it.

The standard hedge is TIPS, Treasury Inflation-Protected Securities, whose principal adjusts upward with the CPI so the investor’s purchasing power keeps pace.

Example: a portfolio earns a 6% nominal return in a year when inflation runs 4%. The real return, what the investor actually gained in purchasing power, is roughly 2%.

When inflation runs hot, the Fed responds by tightening monetary policy, and prices tend to peak near the peak phase of the business cycle.

Practice it: economic factors practice questions

Primary Market

The primary market is where an issuer sells new securities directly to investors for the first time, through an IPO or other underwritten offering, and the sale proceeds go to the issuer itself, not to a selling investor as they would in the secondary market.

The SIE® pairs this term with the secondary market and expects the same regulatory split both ways: the Securities Act of 1933 governs the primary market, registration and prospectus delivery for new issues, while the Securities Exchange Act of 1934 governs secondary-market trading. A firm-commitment underwriting is the classic primary-market transaction, with the underwriter buying the issue from the company and reselling it to the public.

Primary-market sales aren’t only IPOs. A company already trading publicly can also raise new capital in the primary market through a follow-on offering, selling additional new shares, still primary, because the money goes to the company, not to another investor. Private placements exempt from full registration, such as those relying on Regulation D, are primary-market transactions too.

Example: a company sells 1 million new shares in its IPO at $20 each, raising $20 million that goes onto its own balance sheet. Compare that to an investor later reselling those same shares on an exchange. The company’s finances don’t move at all in that trade, because that resale happens in the secondary market.

Practice it: offerings practice questions

Drill these terms

When the definitions feel solid, drill them with order types practice questions, market structure practice questions, and economic factors practice questions, or browse the full SIE exam glossary.

Trading pairs with accounts, tax & retirement for whose account an order settles into, options & derivatives for how these same order types apply to contracts, and debt securities for how interest-rate moves ripple through bond prices. For a full pass at this section, see the Section 1 practice questions.

Related pages

Terms with their own page in this cluster

Every Trading, Markets & Economy term below is defined in full on its own page, with the exam angle and a worked example.

The other SIE glossary clusters

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