Please explain what is a "watch list" "restricted list" "rumor list"?

for brokerage houses, investment banks etc, why they are used, thanks

A restricted list isn't just "restricted stock for employees". If a brokerage house has a restricted list.... that basically says that the financial advisor can not solicit the stock to his clients/family etc. Usually, maybe a big brokerage house is doing an investment banking deal with the company and therefore it would unethical to discuss this company for buying opportunities. Another reason it may be restricted is if there has been a major price movement in the stock, the analyst can put it on the restricted list for a very short period(3-8 days) until he determines what his opinion(Buy, sell, or hold) will be. If it is on the restricted list, it does not mean you (the investor) can not buy this stock, it just means the broker is not suppossed to "solicit" the stock. More or less it has to be "your" idea. And if you work at the brokerage firm and put in a buy order on a restricted stock there is usually some paperwork that needs to be signed/manager approval.

Watch Lists by brokerage firms are usually an analysts idea for a group of stocks to watch. Meaning, they are usually a buy stock with potential to sell and make money in a 12 month time frame. Morgan Stanley has a very popular "watch list".

A rumor list is exactly what it states it to be...stocks that are being priced on the market for a rumor that was started. (whether down or up) Remember, starting a rumor about a company is against the law...and the SEC takes that stuff very serious.

The reason they are used:
1. The restricted list is used to mostly protect them(brokerage firms) from any wrong doing. Whether it be on the investment banking side....or an analyst that had a buy on a stock that just went up 15% in a day(and maybe its time to sell now). Its really just a way to protect the firm from any wrong when soliciting stock.
2. Watch Lists are a marketing tool. Something where clients/stock brokers at the firm can look at a group of stocks and get an idea for the near future.(whether buy or sell) Remember, firms make money when you buy and sell.
3. The rumor list is again a way to protect the firm. It is a list that comprises stocks that can be quickly looked at that may have a reason for their price right now.

FYI-Remember, the chain of sales and soliciting stocks. The analsyts tell the firms what stocks to buy/sell and they repeat that information to the financial advisor(the analsyts are trying to sell their ideas to the brokers), and the financial advisors are weeding through all this information to offer the best ideas that suit their clients and in turn solicit them on their ideas. With all this information, it makes it easy for analysts to pass down "lists" to financial advisors and then for financial advisors to weed through the lists and then pass it down to you the client.

A company that is on a restricted list can not be bought or sold for an employee's account, as they are deemed to have inside information or could front-run (trade for their own account before executing for client accounts).

A watch list could be similar, but I assume you could still trade in those companies (will vary by company). A rumor list is likely one where rumors have been flying around about a certain company, and it may be watched for potential M&A activity or info that could move stock prices.