What it is:
In the finance world, a cancellation is a notice informing athat a trade was made incorrectly. In the insurance world, a cancellation occurs when a policyholder stops paying the premium on an insurance policy and/or the insurance policy is no longer effective.
How it works (Example):
Let's say Jane Smith calls her broker, John Doe, and tells him to buy 1,000 shares of Company XYZ. John puts the trade in, but gets a cancellation telling him that the floor accidentally bought 1,000 shares of Company X instead. John quickly puts in a new trade for Jane and then calls and tells her what happened. Because the price of Company XYZ rose about $0.25 before Jane could actually get her shares, John offers to make her whole on the trade.
In another example, let's say Peter Walker has a term life insurance policy that costs him $100 a month. He loses his job and can't afford to pay the premium anymore. In turn, the insurance company cancels the policy and Peter no longer has life insurance.
Why it Matters:
Computerized trading has vastly improved the accuracy of trading in developed markets, but occasionally somebody types the wrong ticker symbol or transposes a number, causing a cancellation. Cancellations can be a sneaky way of covering up wrongdoing in an account, so they involve a considerable amount of paperwork and verification.
In insurance, cancellations may relieve a consumer of monthly premium payments, but they can also expose the consumer to considerable risk. In Peter's case, a lack of life insurance might beneficiaries of his life insurance policy.