Financial Products and Markets
The Financial Products and Markets domain tests whether you can identify instruments, map how they trade, and calculate the costs and cash flows of a transaction. Questions often combine product knowledge with market microstructure: primary versus secondary issuance, exchange versus OTC trading, order types, settlement, margin, and the economics of the bid-ask spread.
Core rules and concepts
- Primary market raises new capital (IPO, follow-on, bond issuance); secondary market transfers existing securities. Proceeds from a secondary trade go to the seller, not the issuer.
- Exchange-traded products are centrally cleared and transparent; OTC products are bilateral, customizable, and carry counterparty risk.
- Order types: market orders prioritize execution; limit orders prioritize price; stop orders become market orders when a trigger is reached; stop-limit orders may fail to execute after the trigger.
- Quoted spread = ask - bid. Effective spread captures execution price versus midpoint. Market impact is the adverse price move caused by your own order.
- Settlement cycles vary by market and instrument; U.S. equities moved to T+1 in 2024, while many other markets and instruments remain T+2 or longer. Always use the convention stated in the question.
- Short selling requires borrowing securities; margin and recall risk apply. Derivatives include forwards, futures, options, and swaps, each with distinct payoff and collateral mechanics.
Worked example
A stock is quoted 49.95 bid / 50.05 ask. You buy 1,000 shares and later sell 1,000 shares at the same quote, paying commission of $0.01 per share each way. Buy cost = 1,000 x 50.05 = $50,050. Sell proceeds = 1,000 x 49.95 = $49,950. Spread loss = $100. Commission = 1,000 x $0.01 x 2 = $20. Total round-trip cost = $120. The midpoint is $50.00, so the quoted spread is $0.10, or 0.10/50.00 = 20 basis points. Total cost as a percentage of midpoint value ($50,000) is 120/50,000 = 24 bps.
Traps that cost marks
Do not count secondary-market proceeds as new capital for the issuer. Do not ignore commissions or spread when asked for total cost. Do not treat a stop order as a guaranteed price. Do not mix bond price and yield direction: yields rise when prices fall. Do not assume one settlement cycle applies globally.