Securities Markets: Structure, Functions and Mechanics
What a candidate must understand
Securities markets channel savings into issuers and give holders liquidity. Distinguish the primary market (new issuance: IPOs, rights issues, bond launches, where proceeds go to the issuer) from the secondary market (trading among investors, where proceeds go to the seller). Know the difference between exchange-traded venues with central counterparties and order books, and over-the-counter (OTC) markets that are dealer-quoted, bilateral and less transparent. Understand order types (market, limit, stop, stop-limit), quote conventions (bid, offer, spread, mid), and the trade lifecycle: order capture, execution, clearing, settlement. Settlement cycles matter: most major markets have moved to T+1 or T+2, and a question may test which date cash and title actually move. Also know market indices as measures of performance, liquidity (depth, breadth, immediacy) and the effect of market makers providing continuous two-way prices.
Traps that appear in questions
- Confusing a rights issue (primary, issuer receives cash) with buying shares on-exchange (secondary).
- Assuming a limit order executes immediately; it only executes at the limit or better.
- Mixing up clearing (novation, counterparty risk transfer) with settlement (delivery versus payment).
- Treating an index level as a price you can buy; only the index product or futures is tradable.
- Ignoring that a wide bid-offer spread signals illiquidity and higher implicit cost.
Worked example / rule of thumb
A client buys 1,000 shares at a limit of 50.00 when the offer is 49.80. The order fills at 49.80, not 50.00: a limit is a ceiling, not a target. Rule of thumb: primary market = new capital; secondary market = liquidity.