Chapter 2 - Main Industry Participants

Question 1

Who are the key participants in the securities market?

Answer 1

Investors, issuers, brokers, investment banks, custodians, regulators, exchanges, and clearinghouses.

Question 2

What is the role of an investor in the securities market?

Answer 2

To buy and sell securities to generate returns through capital gains and/or income.

Question 3

What is an institutional investor?

Answer 3

A large organization (e.g., pension funds, mutual funds) that invests on behalf of clients.

Question 4

What is a retail investor?

Answer 4

An individual who trades securities for personal investment, not as a business.

Question 5

What is a high-net-worth individual (HNWI)?

Answer 5

A wealthy investor with assets above a specific financial threshold.

Question 6

What is an issuer?

Answer 6

An entity (corporation or government) that offers securities for sale to raise capital.

Question 7

What is an Initial Public Offering (IPO)?

Answer 7

When a company offers shares to the public for the first time.

Question 8

What is a secondary offering?

Answer 8

The sale of new or existing shares by a company after an IPO.

Question 9

What are corporate bonds?

Answer 9

Debt securities issued by companies to raise funds.

Question 10

What are government bonds?

Answer 10

Bonds issued by governments to finance expenditures.

Question 11

What is a broker?

Answer 11

A financial intermediary that executes buy and sell orders on behalf of clients.

Question 12

What is a dealer?

Answer 12

A firm or individual that buys and sells securities for their own account.

Question 13

What is a broker-dealer?

Answer 13

A firm that acts as both a broker (agent) and dealer (principal).

Question 14

What is a full-service broker?

Answer 14

A broker that offers investment advice, research, and trade execution.

Question 15

What is a discount broker?

Answer 15

A broker that only executes trades without offering investment advice.

Question 16

What is an investment bank?

Answer 16

A financial institution that provides underwriting, advisory, and trading services.

Question 17

What is underwriting in securities issuance?

Answer 17

The process where an investment bank guarantees to sell new securities for an issuer.

Question 18

What is a market maker?

Answer 18

A firm that continuously quotes buy and sell prices to ensure market liquidity.

Question 19

What is proprietary trading?

Answer 19

When an investment bank trades securities using its own capital for profit.

Question 20

What is a syndicate in investment banking?

Answer 20

A group of banks working together to underwrite and distribute new securities.

Question 21

What is a stock exchange?

Answer 21

A regulated marketplace where securities are bought and sold.

Question 22

What is an order-driven market?

Answer 22

A market where prices are determined by buy and sell orders placed by participants.

Question 23

What is a quote-driven market?

Answer 23

A market where dealers provide bid and ask prices for securities.

Question 24

What is a dark pool?

Answer 24

A private trading venue where large investors can trade anonymously.

Question 25

What is an Alternative Trading System (ATS)?

Answer 25

A non-exchange venue where securities are traded, such as dark pools.

Question 26

What is a clearinghouse?

Answer 26

An entity that ensures the final settlement of trades and reduces counterparty risk.

Question 27

What is a Central Counterparty (CCP)?

Answer 27

A clearinghouse that acts as an intermediary between buyers and sellers.

Question 28

What is trade settlement?

Answer 28

The process of exchanging securities and funds after a trade.

Question 29

What is T+2 settlement?

Answer 29

A settlement cycle where transactions settle two business days after the trade date.

Question 30

What is net settlement?

Answer 30

A system where only net obligations are settled between market participants.

Question 31

What is a custodian bank?

Answer 31

A financial institution that holds and safeguards securities for investors.

Question 32

What is a Central Securities Depository (CSD)?

Answer 32

An entity that holds securities electronically and facilitates settlement.

Question 33

What is dematerialization?

Answer 33

The process of replacing physical securities with electronic records.

Question 34

What is immobilization of securities?

Answer 34

Holding physical certificates in a central location while transactions occur electronically.

Question 35

What is a sub-custodian?

Answer 35

A custodian appointed by a primary custodian to hold securities in a specific market.

Question 36

What is a financial regulator?

Answer 36

A government agency that oversees financial markets to ensure compliance and stability.

Question 37

What is the role of the Securities and Exchange Commission (SEC)?

Answer 37

The U.S. regulator overseeing securities markets and protecting investors.

Question 38

What is the Financial Conduct Authority (FCA)?

Answer 38

The UK regulator responsible for ensuring fair and efficient financial markets.

Question 39

What is the role of the Prudential Regulation Authority (PRA)?

Answer 39

The UK body responsible for supervising banks and insurers.

Question 40

What is Know Your Customer (KYC)?

Answer 40

A regulatory requirement for financial firms to verify clients’ identities.

Question 41

What is counterparty risk?

Answer 41

The risk that the other party in a trade will default on its obligations.

Question 42

What is settlement risk?

Answer 42

The risk that a trade does not settle as expected, leading to financial loss.

Question 43

What is liquidity risk?

Answer 43

The risk that a firm cannot sell assets quickly without a price drop.

Question 44

What is operational risk?

Answer 44

The risk of financial loss due to system failures, human errors, or fraud.

Question 45

What is systemic risk?

Answer 45

The risk that the failure of one financial institution will impact the entire market.

Question 46

What is a mutual fund?

Answer 46

A pooled investment vehicle managed by professionals.

Question 47

What is an Exchange-Traded Fund (ETF)?

Answer 47

A fund that tracks an index and trades like a stock on an exchange.

Question 48

What is a hedge fund?

Answer 48

A private investment fund using complex strategies to generate returns.

Question 49

What is a pension fund?

Answer 49

A fund that invests money on behalf of individuals for retirement.

Question 50

What is a sovereign wealth fund?

Answer 50

A state-owned investment fund managing national reserves.