Investment Environment Flashcards
6 cards from real IMC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Investment Environment flashcards as text
What is the role of the Financial Services Compensation Scheme (FSCS) in the UK?
Answer: To compensate eligible investors if an authorised firm fails
The FSCS is the UK's statutory deposit insurance and investors' compensation scheme. It protects eligible customers of authorised financial services firms that are unable to pay claims against them, providing compensation up to specified limits (e.g., £85,000 for deposits).
Which of the following is a characteristic of an exchange-traded fund (ETF)?
Answer: It trades on a stock exchange throughout the day like ordinary shares
ETFs are investment funds that trade on stock exchanges during market hours, just like ordinary shares. They can be bought and sold at prevailing market prices throughout the day, unlike traditional open-ended funds which are priced once daily at NAV.
In the context of UK fund structures, what distinguishes an Investment Trust from an OEIC?
Answer: Investment Trusts are closed-ended companies listed on a stock exchange; OEICs are open-ended
An Investment Trust is a closed-ended company listed on a stock exchange with a fixed number of shares. Its share price can trade at a premium or discount to NAV. An OEIC (Open-Ended Investment Company) creates and redeems shares on demand at NAV, so its size fluctuates with investor flows.
What is the primary purpose of a Central Counterparty (CCP) in financial markets?
Answer: To interpose itself between buyer and seller, guaranteeing trade settlement
A CCP stands between the two original counterparties to a trade, becoming the buyer to every seller and the seller to every buyer. This process, called novation, significantly reduces counterparty risk and is a key part of post-trade market infrastructure.
Which of the following best describes 'dark pool' trading?
Answer: Private trading venues where orders are not displayed to the public before execution
Dark pools are alternative trading systems that allow institutional investors to trade large blocks of shares without displaying their orders to the wider market. This helps minimise market impact and price movements that might occur if large orders were visible on public exchanges.
What is the key difference between the 'bid' price and the 'offer' price quoted by a market maker?
Answer: The bid is the price at which the market maker buys; the offer is the price at which it sells
The bid price is what the market maker is willing to pay to buy a security from a seller, and the offer (or ask) price is what the market maker charges to sell a security to a buyer. The difference between them is the bid-offer spread, which represents the market maker's profit margin.