CISI IoI UK Financial Markets Overview — Questions and Answers
Question 1: What is the primary function of the London Stock Exchange (LSE)?
- To regulate all financial services firms in the UK
- To provide a marketplace where buyers and sellers can trade shares and other securities (Correct answer)
- To set UK interest rates
- To insure UK bank deposits
Correct answer: To provide a marketplace where buyers and sellers can trade shares and other securities
The London Stock Exchange provides a regulated market where companies can list their shares and other securities, enabling investors to buy and sell those securities in an organised and transparent environment.
Question 2: What is the difference between the primary market and the secondary market?
- The primary market trades government bonds; the secondary market trades corporate bonds
- The primary market is where new securities are first issued; the secondary market is where already-issued securities are traded between investors (Correct answer)
- The primary market is regulated; the secondary market is unregulated
- The primary market is for retail investors; the secondary market is for institutions only
Correct answer: The primary market is where new securities are first issued; the secondary market is where already-issued securities are traded between investors
In the primary market, companies raise new capital by issuing shares or bonds for the first time (e.g., via an IPO). The secondary market is where investors subsequently trade those already-issued securities among themselves.
Question 3: What is the role of a 'market maker' on the London Stock Exchange?
- To regulate trading activity and prevent fraud
- To provide continuous two-way prices (bid and offer) for securities, ensuring market liquidity (Correct answer)
- To advise companies on their initial public offerings
- To collect stamp duty on share transactions
Correct answer: To provide continuous two-way prices (bid and offer) for securities, ensuring market liquidity
Market makers quote continuous bid (buy) and offer (sell) prices for specified securities, committing to buy or sell at those prices. This provides liquidity, meaning investors can always buy or sell shares quickly.
Question 4: What does the term 'gilts' refer to in UK financial markets?
- Shares in FTSE 100 companies
- UK government bonds issued by HM Treasury (Correct answer)
- Corporate bonds issued by blue-chip UK companies
- Equity ETFs listed on the London Stock Exchange
Correct answer: UK government bonds issued by HM Treasury
Gilts are UK government bonds — debt securities issued by HM Treasury to finance public spending. They are called gilts because the original certificates had gilded edges. They pay a fixed coupon and return the principal at maturity.
Question 5: What is the FTSE 100 index?
- An index of the 100 largest UK government bonds by value
- An index of the 100 largest companies listed on the London Stock Exchange by market capitalisation (Correct answer)
- An index measuring UK consumer price inflation
- An index of the 100 most traded currencies against sterling
Correct answer: An index of the 100 largest companies listed on the London Stock Exchange by market capitalisation
The FTSE 100 is a market capitalisation-weighted index of the 100 largest companies listed on the main market of the London Stock Exchange. It is the primary benchmark for the performance of UK large-cap equities.
Question 6: What is 'stamp duty reserve tax' (SDRT) and when does it apply?
- A tax on property purchases paid to HMRC
- A 0.5% tax on the purchase of UK shares traded electronically through CREST (Correct answer)
- A tax on bond interest payments
- A duty applied when shares are transferred as a gift
Correct answer: A 0.5% tax on the purchase of UK shares traded electronically through CREST
SDRT at 0.5% is charged on the purchase of UK shares settled electronically via CREST. It is paid by the buyer and collected automatically at the point of settlement. Physical share transfers use Stamp Duty, also at 0.5%.
CISI IoI UK Financial Markets Overview
What is the primary function of the London Stock Exchange (LSE)?