You are reading the 2026 curriculum (exams up to November 2026). Sitting in February 2027 or later? Go to the 2027 Equities guide.

Learning Module 1 of Equity Investments 11–14% of the exam

Market Organization and Structure

6 lessons. About 36 minutes in cram mode, 180 minutes in full.

Start with lesson 1 Learn with Sensei Read the module summary

Lessons

1
What the financial system does, and what makes it work well
describe 6 min cram, 28 min full
2
Assets, contracts and the markets they trade in
describe 6 min cram, 32 min full
3
Financial intermediaries and the services they sell
describe 4 min cram, 24 min full
4
Long, short and margin positions
calculate 8 min cram, 36 min full
5
Market, limit and stop orders
compare 6 min cram, 28 min full
6
Primary and secondary markets, and how trading is organized
describe 6 min cram, 32 min full

What the exam expects you to do

Explain the main functions of the financial system.What the financial system does, and what makes it work well
Describe classifications of assets and markets.Assets, contracts and the markets they trade in
Describe the major types of securities, currencies, contracts, commodities, and real assets that trade in organized markets, including their distinguishing characteristics and major subtypes.Assets, contracts and the markets they trade in
Describe types of financial intermediaries and services that they provide.Financial intermediaries and the services they sell
Compare positions an investor can take in an asset.Long, short and margin positions
Calculate and interpret the leverage ratio, the rate of return on a margin transaction, and the security price at which the investor would receive a margin call.Long, short and margin positions
Compare execution, validity, and clearing instructions.Market, limit and stop orders
Compare market orders with limit orders.Market, limit and stop orders
Define primary and secondary markets and explain how secondary markets support primary markets.Primary and secondary markets, and how trading is organized
Describe how securities, contracts, and currencies are traded in quote-driven, order-driven, and brokered markets.Primary and secondary markets, and how trading is organized
Describe characteristics of a well-functioning financial system.What the financial system does, and what makes it work well
Describe objectives of market regulation.What the financial system does, and what makes it work well

Module summary

The whole module on one sheet, organised by lesson: what to memorize, how the ideas fit together, the formulas and the key terms. No paragraphs, just what you need to revise.

Hide what I know

How deeply to learn each part

Know the idea: Understand it in general. It frames other topics, but you will not calculate with it.
Use it: Understand it well enough to solve a question with it. Recognize when it applies.
Memorize: Learn it by heart. The exam will not give it to you.

What the financial system does, and what makes it work well

Known

MemorizeSix uses, and who does what

Use	Direction or motive
Save	money from present to future
Borrow	money from future to present
Raise equity capital	sell ownership, also future to present
Manage risks	hedgers offset a risk they already have
Exchange assets	spot now, or by contract for later
Trade on information	expect a return above the fair return

Memory hook Three uses move money through time (save, borrow, equity). The other three move risk, assets and information.

Know it cold Hedgers reduce a risk. Information-motivated traders take a view. Investors expect only a fair return.

MemorizeWell-functioning system: the names

Feature	Name
Right instruments exist	complete markets
Low commissions, spreads, price impact	operationally efficient
Prices reflect fundamental value	informationally efficient
Capital goes to best uses	allocationally efficient

Memory hook Complete + operationally efficient → informationally efficient → allocationally efficient. Operational = operating costs.

Know it cold Timely disclosure supports informational efficiency. It is not itself informational efficiency.

MemorizeObjectives of regulation

Memory hook Fraud, agents, fairness, standards, thin capital, unfunded promises. No guaranteed returns.

Know it cold Regulation targets fairness and solvency, never investor profit.

Key terms

saving and borrowing Know the idea
hedgers Use it
information-motivated traders Use it
equilibrium interest rate Use it
allocationally efficient Memorize
complete markets Memorize
operationally efficient Memorize
informationally efficient market Memorize
market regulation Memorize

Six things people use the financial system for

Using the financial systemmoving money, risk and assets through time and space

Move money through time
- Save Use it present to future
- Borrow Use it future to present
- Raise equity capital Use it sell ownership to fund projects now
Move risk
- Manage risks (hedge) Use it offset a risk you already have
Move assets
- Exchange assets Use it for immediate (spot) or future delivery
- Trade on information Use it expect a return above the fair return

What makes a financial system work well

Allocationally efficient economycapital goes where it is most valuable

Informationally efficient prices Memorize prices reflect fundamental value
- Operationally efficient markets Memorize cheap trading: commissions, spreads, price impact
- Timely disclosure Use it cheap to learn fundamental value
Complete markets Memorize instruments exist for every financial problem

Six objectives of market regulation

Market regulationprotects fairness and solvency, never returns

Control fraud Memorize theft and misrepresentation
Control agency problems Memorize agents putting their own interest first
Promote fairness Memorize insiders versus outsiders
Set mutually beneficial standards Memorize accounting, reporting, trading rules
Stop undercapitalized firms taking excessive risk Memorize with clients' money
Ensure long-term liabilities are funded Memorize pensions, insurance

Assets, contracts and the markets they trade in

Known

MemorizeFive ways to split markets

Split	One side	Other side
Timing	spot: delivery now	forward/futures/options: later
Maturity	money: debt ≤ 1 year	capital: longer debt and equity
Seller	primary: issuer sells	secondary: investors trade
Tradition	traditional: public debt, equity, pooled funds	alternative: hedge funds, private equity, real estate, commodities, collectibles
Registration	public: registered, liquid	private: qualified investors, illiquid

Memory hook Money market = "a year or less". Primary = the issuer gets the cash.

Know it cold The money market ends at one year. A two-year note is a capital market instrument.

MemorizeForward versus futures

	Forward	Futures
Terms	customized	standardized
Venue	private	exchange
Counterparty risk	yes	clearinghouse guarantees
Exit	needs the other side to agree	trade out with anyone
Settlement	at the end	daily, through margin

Memory hook Futures = forward + clearinghouse + standard terms.

Know it cold A warrant is issued by the company and grouped with equity.

Key terms

securities Use it
public and private securities Know the idea
currencies Know the idea
commodities Know the idea
real assets Use it
contracts Use it
spot markets Use it
money market Memorize
capital markets Memorize
primary market Use it
secondary market Use it
traditional investment markets Use it
alternative investment markets Use it
pooled investments Use it
warrants Use it
forward contract Memorize
futures contract Memorize
swap contract Use it
option contract Use it

What trades: financial and physical assets

Assets that trade

Financial assets
- Securities Memorize debt, equity, pooled vehicles
- Currencies Use it money issued by national authorities
- Contracts Memorize agreements to exchange later
Physical assets
- Commodities Use it metals, energy, agriculture, carbon credits
- Real assets Use it real estate, aircraft, machinery

Securities and their main subtypes

Securitiespublic (registered, liquid) or private (qualified investors, illiquid)

Fixed income Memorize promises to repay
- Bills, notes, bonds by term, short to long
- Commercial paper short-term corporate
- Repos, deposits, mortgages similar promises
Equity Memorize ownership
- Common shares residual claim, votes
- Preferred shares priority and fixed dividend, usually no vote
- Warrants issuer-written call options, grouped with equity
Pooled investments Use it shared ownership of a portfolio
- Mutual funds open-end or closed-end
- ETFs and exchange-traded notes (ETNs) open-end, trade in the secondary market
- Asset-backed securities tranches of a loan pool
- Hedge and private equity funds limited partnerships

Contracts: what each one is

Contractsmost derive value from an underlying asset

Forward Memorize private, customized, counterparty risk
Futures Memorize standardized, exchange traded, clearinghouse guarantee
Swap Use it exchange of periodic payments
Option Use it right, not obligation; premium paid
Insurance and credit default swaps Know the idea pay on a specified event

Financial intermediaries and the services they sell

Known

MemorizeBroker versus dealer

	Broker	Dealer
Role	agent	principal
Owns the asset?	no	yes, from inventory
Paid by	commission	bid–ask spread
Service	finds the other side	liquidity through time

Memory hook Broker = bridge. Dealer = warehouse.

Know it cold A broker–dealer has a conflict of interest when it chooses between filling an order as agent or as principal.

MemorizeWho guarantees what

Institution	Job
Clearinghouse	arranges settlement; in futures, buyer to every seller and seller to every buyer
Custodian	holds assets; protects against theft, loss, double pledging
Securitizer	buys assets, pools them in an SPV, sells tranches
Insurer	pools uncorrelated risks; guards against moral hazard, adverse selection, fraud

Memory hook Every intermediary sells a match, a pooled risk or a promise that the trade will settle.

Know it cold Arbitrageurs offset risk across markets. They are not directional speculators.

Key terms

broker Memorize
block brokers Use it
investment banks Use it
exchange Use it
alternative trading systems Use it
dealers Memorize
broker–dealer Use it
arbitrageurs Memorize
securitizers Memorize
special purpose vehicle Use it
depository institutions Use it
insurance companies Use it
clearinghouse Memorize
custodian Use it
counterparty risk Use it

What each intermediary sells

Financial intermediariesa match, liquidity, a repackaged claim or a settlement promise

A match (agent, does not trade) Memorize
- Broker finds a counterparty, earns commission
- Block broker places very large orders without moving price
- Exchange and ATS venue and rules; exchanges also regulate members
- Investment bank advises on and arranges issuance and mergers
Liquidity (principal, takes the other side) Memorize
- Dealer own inventory, earns the bid–ask spread, moves liquidity through time
- Arbitrageur same or equivalent risk, two markets, moves liquidity across markets
A repackaged claim Use it
- Securitizer pool of loans into an SPV, sells tranches
- Depository institution deposits in, loans out
- Insurance company pools many uncorrelated risks
A settlement promise Memorize
- Clearinghouse settles; in futures guarantees both sides
- Custodian or depository holds assets, protects against loss

Long, short and margin positions

Known

MemorizeMargin formulas

Quantity	Formula
Leverage ratio	position ÷ equity
Maximum leverage	1 ÷ initial margin
Margin call price (long)	$P_0 \times (1 - \text{IM}) \div (1 - \text{MM})$
Return on equity	(ending − starting equity) ÷ starting equity

Memory hook 50% margin = 2×, 40% = 2.5×, 25% = 4×. The call price uses the loan (1 − IM), not the maintenance margin alone.

Know it cold Ending equity = proceeds − loan − interest + dividends − sale commission. Interest is charged either way.

MemorizeShort position facts

Memory hook Short = borrow, sell, buy back ("cover"). The dividend you owe is the lender's.

Know it cold Gain at most 100%, loss unlimited, pay dividends to the lender, proceeds left as collateral earning the rebate rate.

Key terms

long position Use it
short position Use it
payments in lieu of dividends Use it
short rebate rate Use it
margin loan Use it
call money rate Use it
initial margin requirement Memorize
maintenance margin requirement Memorize
leverage ratio Memorize
margin call Memorize

Long versus short

Positions in an asset

Long Memorize own it, or hold the right to receive it
- Gains when the price rises gain unlimited
- Maximum loss 100% with no liabilities attached
Short Memorize sold what was borrowed, or sold a contract
- Gains when the price falls maximum gain 100%
- Loss unlimited price can rise without limit
- Pays dividends to the lender payments in lieu
- Proceeds held as collateral earn the short rebate rate

Equity in a margin purchase

Return on equity(ending equity − starting equity) ÷ starting equity

Starting equity E₀ Use it equity paid plus purchase commission
Ending equity E₁ Use it
- Sale proceeds plus
- Loan repayment minus
- Margin interest minus, loan × call money rate
- Dividends received plus
- Sale commission minus

Formulas

Leverage ratio Memorize

L = \frac{\text{position value}}{\text{equity}}

Quick example

A position worth 30,000 supported by 12,000 of equity. 30,000 ÷ 12,000 = 2.5.

On your calculator

30000÷12000= 2.5

30000ENTER12000÷ 2.5

ENTER enter (on the HP, puts the number on the stack)

Maximum leverage ratio Memorize

L_{\max} = \frac{1}{\text{initial margin}}

Quick example

Initial margin requirement 40%. 1 ÷ 0.40 = 2.5.

On your calculator

0.41/x 2.5

1/x reciprocal

0.41/x 2.5

1/x reciprocal

Return on a margin purchase Use it

R = \frac{E_1 - E_0}{E_0}, \quad E_0 = N P_0\,\text{IM} + c, \quad E_1 = N P_1 - \text{loan} - \text{interest} + \text{dividends} - c

Quick example

Buy 300 shares at USD 40.00 on 50% margin, call money 4%, dividend 0.50, no commissions, sell at 46.00. E₀ = 6,000. E₁ = 13,800 − 6,000 − 240 + 150 = 7,710. R = 1,710 ÷ 6,000 = 28.5%.

On your calculator

300×46−6000−240+150−6000=÷6000= 0.285

300ENTER46×6000−240−150+6000−6000÷ 0.285

ENTER enter (on the HP, puts the number on the stack)

Margin call price (long position) Memorize

P_{\text{call}} = P_0 \times \frac{1 - \text{IM}}{1 - \text{MM}}

Quick example

A USD 120 share bought on 40% initial margin with a 25% maintenance margin. 120 × 0.60 ÷ 0.75 = USD 96.00.

On your calculator

1−0.4=×120÷(1−0.25)= 96

1ENTER0.4−120×1ENTER0.25−÷ 96

ENTER enter (on the HP, puts the number on the stack)

Market, limit and stop orders

Known

MemorizeMarket versus limit

	Market order	Limit order
Instruction	best price now	best price, never worse than limit
Execution	almost certain	uncertain, may never fill
Price	uncertain, price concessions	worst case known
Main risk	paying too much	missing the trade

Memory hook Market buys certainty of execution. Limit buys certainty of price.

Know it cold A buy limit fills at the limit or lower. It is not an order to trade exactly at the limit.

MemorizeLimit versus stop

	Limit price	Stop price
Role	worst acceptable price	trigger for the order to become active
Sell	at or above the limit	after a trade at or below the stop
Buy	at or below the limit	after a trade at or above the stop

Memory hook Limit = a price condition. Stop = a trigger. Execution = how, validity = when, clearing = settle.

Know it cold A triggered stop becomes a market order unless it also has a limit. It does not guarantee the stop price.

Key terms

bid Use it
ask Use it
best bid Use it
best offer Use it
market bid–ask spread Use it
market order Memorize
limit order Memorize
marketable limit order Memorize
behind the market Memorize
execution instructions Memorize
validity instructions Memorize
clearing instructions Memorize
all-or-nothing orders Use it
hidden order Use it
iceberg order Use it
day order Use it
good-till-cancelled order Use it
immediate or cancel order Use it
good-on-close Use it
stop order Memorize

Three kinds of instruction

Order instructionsevery order names instrument, size and side first

Execution Memorize how to fill
- Market best price available now
- Limit never worse than the limit price
- All-or-nothing, minimum fill size conditions
- Hidden, iceberg exposure: hide all or show a display size
Validity Memorize when it may fill
- Day, good-till-cancelled how long the order lives
- Immediate or cancel (fill or kill) only on receipt
- Good-on-open, good-on-close only at the open or close
- Stop valid only after a trigger trade
Clearing Memorize how to settle
- Settling broker or custodian standing instruction
- Long sale or short sale required on every sell order

Where a buy limit order sits

Buy limit order versus the quotesell limits mirror it

At or above the best offer Memorize marketable: trades now
Between best bid and best offer Memorize makes a new market (new best bid)
At the best bid Memorize makes the market, joins the queue
Below the best bid Memorize behind the market, waits

Primary and secondary markets, and how trading is organized

Known

MemorizePricing rules

Rule	Price	Where
Uniform	one price for all trades, set to maximize volume	call markets
Discriminatory	each trade at the standing order's limit price	continuous markets
Derivative	taken from another market, often the midpoint	crossing networks

Memory hook Call = uniform (one auction price). Continuous = discriminatory (a large order walks the book).

Know it cold Order precedence: price first, then display, then time.

MemorizeThree market structures

	Quote-driven	Order-driven	Brokered
Prices set by	dealer quotes	matching rules	negotiation
Typical use	bonds, currencies	most stock exchanges	real estate, blocks, art
Liquidity from	dealer inventory	order book	broker network

Memory hook Dealer, book, phone.

Know it cold Underwritten = bank guarantees the sale. Best effort = bank only tries.

Key terms

initial public offering Use it
seasoned offering Use it
book building Use it
underwritten offering Memorize
best effort offering Memorize
shelf registration Use it
private placement Use it
rights offering Use it
call market Memorize
continuous trading market Memorize
quote-driven market Memorize
order-driven markets Memorize
brokered market Memorize
order precedence hierarchy Memorize
uniform pricing rule Memorize
discriminatory pricing rule Memorize
derivative pricing rule Memorize
crossing networks Use it
pre-trade and post-trade transparency Know the idea

How issuers raise money in the primary market

Primary marketthe issuer sells and receives the cash

Public offering
- IPO Memorize first sale of shares to the public
- Seasoned offering Memorize more shares from a listed issuer
- Underwritten Memorize bank guarantees the sale and takes unsold shares
- Best effort Memorize bank only acts as broker
- Shelf registration Use it register once, sell over time
Private placement Use it qualified investors, cheaper, less liquid, higher required return
Other routes
- Rights offering Use it existing holders get the right to buy at a set price
- Dividend reinvestment plan Know the idea dividends buy new shares
- Government auction Know the idea bills, notes, bonds

How secondary markets are organized

Secondary market structureswho supplies the other side

Quote-driven Memorize dealers quote, customers trade at their prices
Order-driven Memorize rules match orders
- Call market one price, uniform rule
- Continuous market standing order price, discriminatory rule
- Crossing network price taken from another market, derivative rule
Brokered Memorize broker finds a partner

Formulas

Average price of a large market order Use it

\bar{P} = \frac{\sum_i q_i P_i}{\sum_i q_i}

Quick example

A market buy for 2,000 shares hits offers of 800 at 18.40 and 1,200 at 18.45. (800 × 18.40 + 1,200 × 18.45) ÷ 2,000 = 18.43.

On your calculator

(800×18.4)+(1200×18.45)=÷2000= 18.43

800ENTER18.4×1200ENTER18.45×+2000÷ 18.43

ENTER enter (on the HP, puts the number on the stack)

Cheat sheet · PDF · 5 A4 pages

Market Organization and Structure on 5 pages

What to memorize, the concept maps, every formula with a worked example and keystrokes for the TI BA II Plus and HP 12C, how each idea is asked, and the traps. Print it, or keep it on your phone.

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