FIA Equity Markets & Trading 3 — Questions and Answers
Question 1: What is the difference between a primary market and a secondary market?
- Primary markets trade bonds; secondary markets trade equities
- Primary markets are for new securities issuances; secondary markets trade existing securities (Correct answer)
- Primary markets are regulated; secondary markets are unregulated
- Primary markets operate in the morning; secondary markets operate in the afternoon
Correct answer: Primary markets are for new securities issuances; secondary markets trade existing securities
Primary markets facilitate the issuance of new securities (e.g., IPOs), while secondary markets allow investors to trade previously issued securities among themselves.
Question 2: What is a 'dark pool' in equity trading?
- A trading venue that operates only during overnight sessions
- A private exchange where large orders are matched anonymously away from public markets (Correct answer)
- A high-risk speculative trading strategy used by hedge funds
- A blackout period during which insiders cannot trade company stock
Correct answer: A private exchange where large orders are matched anonymously away from public markets
Dark pools are private trading venues that allow institutional investors to execute large trades anonymously, minimizing market impact.
Question 3: What does the bid-ask spread represent?
- The difference between opening and closing prices of a stock
- The difference between the highest price a buyer will pay and the lowest price a seller will accept (Correct answer)
- The total commission charged by a broker on a round-trip trade
- The range of prices at which a stock traded during the day
Correct answer: The difference between the highest price a buyer will pay and the lowest price a seller will accept
The bid-ask spread is the difference between the highest price buyers are willing to pay (bid) and the lowest price sellers will accept (ask), representing the implicit trading cost.
Question 4: Which index is most commonly used as a benchmark for large-cap US equities?
- Russell 2000
- Dow Jones Industrial Average
- S&P 500 (Correct answer)
- Wilshire 5000
Correct answer: S&P 500
The S&P 500, which tracks 500 large-cap US companies, is the most widely used benchmark for measuring US large-cap equity performance.
Question 5: What is a 'stop-loss order'?
- An order that prevents a stock from falling below a certain price
- An order that becomes a market order once a specified price trigger is reached (Correct answer)
- An order that locks in a profit by selling at a preset price above cost
- An order placed to buy a security when it reaches a new high
Correct answer: An order that becomes a market order once a specified price trigger is reached
A stop-loss order becomes a market order once the stock hits the stop price, designed to limit an investor's loss on a position.
Question 6: What is 'algorithmic trading'?
- Trading based on fundamental analysis using financial ratios
- The use of computer programs to execute trades based on pre-defined rules and models (Correct answer)
- A strategy where trades are made following advice from a financial algorithm
- Manual trading executed according to a fixed daily schedule
Correct answer: The use of computer programs to execute trades based on pre-defined rules and models
Algorithmic trading uses automated computer programs to execute trades based on predefined criteria such as price, timing, and volume conditions.
Question 7: In equity markets, what does 'market capitalization' measure?
- The total value of a company's annual revenues
- The total market value of a company's outstanding shares (Correct answer)
- The maximum value a stock can reach in a given trading session
- The total assets a company holds on its balance sheet
Correct answer: The total market value of a company's outstanding shares
Market capitalization is calculated by multiplying a company's total outstanding shares by the current share price.
FIA Equity Markets & Trading 3
What is the difference between a primary market and a secondary market?