Equity Markets, Instruments and Market Participants
What this domain tests
Questions here test whether you can classify an equity instrument by its cash-flow and voting rights, identify the venue where it trades, and match each activity in the chain from issuer to investor with the correct participant. Expect ranking questions (who is paid first), true/false statements about market structure, and questions that ask who bears principal risk.
Core rules and concepts
- Ordinary (common) shares carry a residual claim: dividends are discretionary and rank after preference dividends, and holders absorb losses first. Normally one vote per share.
- Preference shares rank ahead of ordinary shares for dividends and liquidation proceeds but behind creditors. The dividend is usually fixed as a percentage of par and may be cumulative (arrears must be cleared before any ordinary dividend) or non-cumulative. Often non-voting and sometimes redeemable.
- Venues: regulated exchanges, multilateral trading facilities (MTFs) and over-the-counter (OTC) bilateral trading. Order-driven books match buyers against sellers under price-time priority; quote-driven markets depend on market makers quoting two-way prices and taking principal risk.
- Participants: issuers, buy-side investors, sell-side brokers (agency), market makers (principal), custodians, transfer agents, central counterparties, central securities depositories and regulators.
Worked example
A company is wound up with £10m remaining after creditors are paid. It has 1m ordinary shares and 1m £1 preference shares paying 5%, with two years of dividends in arrears. Preference holders receive par plus arrears: £1.00 + (2 × £0.05) = £1.10 per share, £1.1m in total. The remaining £8.9m goes to ordinary holders, £8.90 per share. Priority matters most when the pool is small.
Traps that cost marks
Preference dividends are not guaranteed - they are only a priority claim. A non-voting share is not automatically a preference share. An MTF is not an exchange, and admission to trading there is not a listing. Custodians safekeep assets; they do not take market risk on the client's behalf.