Equity Markets and Instruments
Equity Markets and Instruments tests how shares trade, how orders are executed, and how instrument features change an investor’s economic exposure. Expect questions on primary versus secondary markets, exchange versus dealer/OTC trading, settlement, corporate actions, and the distinction between common stock, preferred stock, depositary receipts, and fund wrappers.
Core rules
- A primary-market transaction raises capital for the issuer; secondary trading transfers ownership and does not fund the company.
- A market order prioritizes execution; a limit order prioritizes price and may remain unfilled. A stop order becomes a market order once a trigger is reached, so slippage is possible.
- Long positions gain from price appreciation; short positions profit from price declines but carry unlimited loss potential and borrowing costs.
- Cum-dividend buyers receive the declared dividend; sellers after the ex-date do not. Record date and ex-date are not interchangeable.
- ADRs represent foreign shares, often with a ratio that changes per-share economics.
Worked example
An investor buys 1,000 shares at $25 and pays $10 commission, then sells at $28 and pays $10. Gross proceeds are $28,000; gross cost is $25,000; commissions total $20. Net profit is $2,980. Net return is $2,980 ÷ ($25,000 + $10) = 11.92%. Using the $25,000 purchase price alone gives approximately the same rounded result only because the $10 is small; use total cash invested for precision.
Traps
Do not treat a stop-limit order as guaranteed execution. Do not confuse market capitalization with enterprise value. Remember that short sellers must borrow shares and may face recall. A stock split changes share count and price per share but not ownership percentage or market value.