Glossary: Market Structure and Trading Terms

Market mechanics form the foundation of how investments are bought and sold. Whether you're placing your first trade or analyzing execution quality, knowing terms like bid-ask spread, market maker, and settlement cycle helps you interpret price movements and avoid costly mistakes. This glossary distills essential concepts into clear definitions to build your confidence in market structure.

The terms below are organized alphabetically. Quantitative examples and practical context are included where relevant to illustrate real-world applications. Markets evolve, so revisit this resource periodically for updates on regulatory or structural changes.

Alphabetized Term List

Ask Price

The lowest price a seller is willing to accept for a security. For example, if a stock has an ask price of $50.10, you must pay at least that amount to buy it. The difference between the ask and bid price creates the bid-ask spread.

Bid-Ask Spread

The difference between the highest price buyers will pay (bid) and the lowest price sellers will accept (ask). In liquid stocks like Apple (AAPL), the spread might be $0.01-$0.05. Wider spreads often indicate lower liquidity or higher volatility.

Dark Pool

A private trading venue for large institutional orders that aren't displayed on public exchanges. These pools account for ~10-15% of U.S. equity trading volume, per SEC estimates, and aim to reduce market impact from massive trades.

Exchange

An organized marketplace where securities are traded. Major examples include the New York Stock Exchange (NYSE) and Nasdaq. Exchanges enforce rules for transparency and fair pricing.

Fill or Kill (FOK)

An order type requiring immediate execution of the entire trade or cancellation. FOK orders are common in algorithmic trading to avoid partial fills that could disrupt strategy timing.

Limit Order

An instruction to buy or sell at a specified price or better. For instance, a limit order to buy at $49.90 will only execute if the stock drops to that level. Limit orders ensure price control but aren't guaranteed to fill.

Market Maker

Firms or traders who provide liquidity by continuously quoting both buy and sell prices. Market makers profit from the bid-ask spread and are required to maintain fair pricing under SEC Rule 11Ac1-4.

Order Book

A real-time record of buy and sell orders for a security. The top of the order book shows the best bid and ask prices, while deeper levels reveal liquidity at less favorable prices.

Settlement

The process of finalizing a trade by transferring ownership of securities and payment. In the U.S., most trades settle in two business days (T+2), meaning shares and cash change hands on the second business day after trade execution.

Short Selling

Selling borrowed shares with the expectation of buying them back cheaper to return to the lender. Short sellers must maintain a minimum 25-30% margin requirement (per Regulation SHO) to cover potential losses.

Stop-Loss Order

An order to sell once a security reaches a specified price to limit losses. For example, a $50 stop-loss on a $55 stock would trigger a sale if the price drops to $50, capping the loss at ~9%.

Volume

The number of shares or contracts traded in a specific period. High volume (e.g., 10 million shares) often confirms price trends, while low volume may indicate weak conviction in price movements.

VWAP (Volume-Weighted Average Price)

A benchmark showing the average price a security has traded at throughout the day, weighted by volume. Traders use VWAP to assess if they're buying above or below the "fair" average price.

Blue Chip Stocks

Shares of large, well-established companies with strong market capitalizations (e.g., Microsoft at ~$2.5 trillion). These stocks typically offer lower volatility and higher liquidity than smaller firms.

High-Frequency Trading (HFT)

Algorithmic trading strategies that execute thousands of orders per second to exploit tiny price discrepancies. HFT accounts for ~50% of U.S. equity trading volume but remains controversial due to speed advantages.

Closing Note on Updates

Regulatory changes, technological advancements, and market trends can alter definitions and practices. Check authoritative sources like the SEC or FINRA for the latest on topics like T+1 settlement reforms or dark pool transparency rules. Use this glossary as a starting point, not an endpoint, for your market education.