Investment Products, Markets and Operations
This domain covers what is traded, where it is traded, and how a trade becomes settled cash and stock. Questions often combine a product characteristic with an operational consequence, such as how accrued interest or a corporate action changes the cash a client pays.
Products
- Equities: ordinary shares confer ownership, voting and dividends. The ex-dividend date determines whether a buyer or seller receives the declared dividend.
- Fixed income: coupons, redemption and issuer credit risk. Prices and yields move inversely. Bonds are quoted clean; the buyer also pays accrued interest, so the consideration equals clean price plus accrued interest.
- Funds: OEICs (ICVCs) and unit trusts are open-ended and priced at net asset value; unit trusts are dual-priced with a spread. Investment trusts are closed-ended companies whose shares can trade at a premium or discount to NAV and may use gearing. ETFs trade intraday and may be physically backed or synthetic.
- Derivatives: futures, options (call and put, premium, strike), swaps. Leverage magnifies both gains and losses and requires margin.
Markets
- Primary market activity includes IPOs, placings and rights issues; the secondary market is trading between investors.
- London listings run across the Main Market and AIM; alternative venues include multilateral trading facilities and OTC dealing.
- MiFID II drives transparency, best execution and transaction reporting obligations.
Operations
- Trade capture, confirmation and affirmation, clearing through a central counterparty by novation, settlement, custody and nominee arrangements, corporate actions, reconciliations and failed trades.
- Client money must be segregated under CASS 7; client assets held in custody are protected separately.
Worked example
A client buys £50,000 nominal of a gilt quoted at a clean price of 98.50 with accrued interest of 2.40 per £100 nominal. Consideration = (98.50 + 2.40) = 100.90 per £100 nominal; £50,000 nominal is 500 units of £100, so 500 × £100.90 = £50,450. The seller receives the accrued interest because they held the bond during the accrual period.
Traps that cost marks
- Quoting consideration from the clean price and ignoring accrued interest.
- Confusing the ex-dividend date with the payment date.
- Describing an investment trust as open-ended, or assuming it always trades at NAV.
- Assuming settlement is T+3 when the standard equity cycle is T+2.