SIAA Fundamentals of Securities cheat sheet

Primary market: issuer sells new securities to investors and receives the proceeds; secondary market: investors trade existing securities among themselves and the issuer receives nothing.

Money market instruments have original maturities of one year or less (T-bills, commercial paper, CDs, repos); capital market instruments exceed one year (bonds, equities, long-term notes).

Broker acts as agent and earns commission, bearing no principal price risk; dealer acts as principal, quotes bid and ask, and earns the spread while holding inventory risk.

Order flow sequence: investor to broker-dealer, to exchange or alternative trading system, to clearinghouse, to settlement; each step adds a distinct counterparty obligation.

Issuers raise capital via public offering, private placement, or rights offering; a rights offering gives existing holders a preemptive claim, protecting them against dilution.

Market participants by function: issuers (demand capital), investors (supply capital), intermediaries (brokers, dealers, underwriters), and infrastructure (exchanges, CCPs, CSDs, regulators).

Institutional investors (pension funds, insurers, mutual funds, sovereign funds) dominate volume; retail investors dominate account counts but not turnover.

Liquidity has three dimensions: tightness (bid-ask spread), depth (size available at quoted prices), and resilience (speed of price recovery after a large trade).

Common shareholders are residual claimants: they rank last on liquidation, after creditors and preferred holders, but hold voting rights and unlimited upside.

Preferred stock ranks ahead of common for dividends and liquidation, usually carries no vote, and behaves like a hybrid of debt (fixed payment) and equity.

Cumulative preferred dividends in arrears must be paid before any common dividend; non-cumulative preferred forfeits skipped dividends.

Dividend discount model: P0 = D1 / (r - g), where g is the sustainable growth rate; the model fails when g approaches or exceeds r.

Sustainable growth rate g = ROE x (1 - payout ratio); a higher retention ratio raises g but may lower ROE if reinvestment returns are poor.

P/E ratio = price per share / earnings per share; trailing P/E uses last twelve months earnings, leading P/E uses forecast earnings.

Book value per share = (total assets - total liabilities - preferred equity) / common shares outstanding; it reflects accounting cost, not market value.

Stock split changes share count and price proportionally without altering market capitalization or shareholder wealth; a reverse split does the opposite.

Preemptive rights let existing holders buy new shares before the public to avoid dilution; warrants give the right to buy shares at a fixed price for a stated period.

Bond price and yield move inversely; the relationship is convex, so price gains from a yield fall exceed price losses from an equal yield rise.

Macaulay duration is the weighted average time to cash flows; modified duration = Macaulay duration / (1 + y/m), and approximate price change = -modified duration x change in yield.

Longer maturity, lower coupon, and lower yield each increase duration and therefore price sensitivity to rate changes.

Credit spread = bond yield - benchmark yield of the same maturity; widening spreads signal deteriorating credit or rising risk aversion.

Yield to maturity assumes all coupons are reinvested at the YTM itself; realized return differs when reinvestment rates diverge from YTM.

Accrued interest compensates the seller for interest earned since the last coupon; clean price + accrued interest = dirty (full) price.

Callable bonds cap upside for investors and are quoted to yield-to-call; putable bonds protect investors and are quoted to yield-to-put.

Investment-grade ratings are BBB-/Baa3 and above; below that, bonds are high yield, with default risk rising sharply as ratings fall.

Forward contract: private, customizable, settled at maturity, and carries counterparty credit risk; futures are exchange-traded, standardized, and marked to market daily through a clearinghouse.

Call payoff at expiry to the buyer = max(S - K, 0); put payoff = max(K - S, 0); the buyer pays a premium, the writer receives it and bears the obligation.

Put-call parity for European options on non-dividend stock: C + K/(1+r)^T = P + S; a violation permits arbitrage.

Interest rate swap: one party pays fixed and receives floating; a plain vanilla swap can be valued as a difference between a fixed-rate and a floating-rate bond.

Hedge fund strategies differ by exposure: long/short equity, global macro, event-driven, relative value, and managed futures; fees typically follow a 2-and-20 structure.

Private equity is illiquid with long lock-ups, capital calls, and J-curve return patterns; valuation relies on periodic marks rather than continuous market prices.

Real assets (real estate, infrastructure, commodities) offer inflation sensitivity and low correlation with bonds, but carry appraisal and liquidity risk.

Leverage magnifies both gains and losses; a strategy's risk-adjusted return should be judged after fees, financing costs, and liquidity premiums.

Open-end mutual funds issue and redeem at net asset value computed at the end of each trading day; closed-end funds trade at market prices that may differ from NAV.

NAV per share = (total assets - total liabilities) / shares outstanding; the fund itself does not create or destroy value through flows.

Exchange-traded funds trade intraday like stocks and use in-kind creation/redemption by authorized participants to keep price close to NAV.

Expense ratio = annual fund operating expenses / average net assets; it excludes sales loads and brokerage commissions paid by the fund.

Active management seeks alpha and charges higher fees; passive management seeks beta at low cost, and net-of-fee performance is the fair comparison.

Fiduciary duty in asset management: act in the client's best interest, manage conflicts, seek best execution, and disclose fees and risks clearly.

Performance measurement: time-weighted returns strip out cash-flow timing effects, while money-weighted returns (IRR) reflect the investor's actual experience.

Separately managed accounts offer direct ownership and tax customization; commingled funds offer pooled diversification and lower minimums.

Market order executes immediately at the best available price with price uncertainty; limit order sets a price bound but may never fill.

Stop order becomes a market order once the stop price trades; a stop-limit order becomes a limit order, risking no execution in a fast market.

Bid-ask spread is the implicit cost of immediacy; effective spread = 2 x |trade price - midpoint|, capturing execution quality.

Price priority ranks orders by price first; time priority breaks ties, so an earlier order at the same price fills first.

Short sale: sell borrowed shares, buy back later to return them; loss is theoretically unlimited, and margin and locate rules apply.

Margin buying: initial margin is the percentage of purchase price the investor supplies; maintenance margin triggers a margin call when equity falls below the requirement.

Algorithmic execution strategies include VWAP, TWAP, and implementation shortfall; each trades off market impact against timing risk.

Best execution considers price, speed, likelihood of execution, size, and total cost, not price alone.

Trade date is when the transaction is executed; settlement date is when securities and cash legally exchange ownership.

Standard US equity settlement is T+1; many bond and money market trades settle the same day or next day by convention.

Central counterparty (CCP) novates each trade, becoming buyer to every seller and seller to every buyer, thereby reducing bilateral counterparty risk.

Novation, netting, and margin (initial and variation) are the CCP's core risk controls; variation margin reflects daily mark-to-market moves.

Delivery versus payment (DVP) links securities transfer and cash payment so that one cannot occur without the other, eliminating principal risk.

Custodians hold assets, process corporate actions, and reconcile positions; they safeguard assets but do not guarantee investment outcomes.

Fails to deliver occur when the seller does not deliver securities on settlement date; they create buy-in risk and funding costs.

Straight-through processing reduces manual intervention and operational risk by automating confirmation, clearing, and settlement steps.

Regulators pursue three goals: investor protection, fair and efficient markets, and systemic stability; each rule should be mapped to one of these.

Disclosure-based regulation requires issuers to publish accurate material information; insider trading rules prohibit dealing on non-public material information.

Registration of firms and representatives, capital adequacy, and recordkeeping are core compliance obligations for intermediaries.

Suitability and know-your-customer duties require matching recommendations to client objectives, risk tolerance, and financial circumstances.

Anti-money-laundering controls include customer identification, transaction monitoring, and suspicious activity reporting to the financial intelligence unit.

Market abuse covers insider dealing, market manipulation, and unlawful disclosure; surveillance and suspicious transaction reports are detection tools.

Conflicts of interest must be identified, disclosed, and managed, typically by information barriers, personal trading rules, and gift limits.

Regulatory capital and liquidity rules (such as risk-based capital ratios) aim to keep firms solvent through stress and protect clients and the system.

CFA Institute Code of Ethics: act with integrity, place client interests first, use reasonable care, and uphold the profession's reputation.

Standard I: knowledge of the law requires compliance with the stricter of applicable law and the Code; do not knowingly participate in violations.

Standard II: integrity of capital markets prohibits material non-public information use and market manipulation.

Standard III: duties to clients include loyalty, prudence, care, fair dealing, suitability, performance presentation, and confidentiality.

Standard IV: duties to employers cover loyalty, whistleblowing on illegal activity, and avoiding conflicts of interest with outside work.

Standard V: investment analysis requires diligence, reasonable basis, and communication of the distinction between fact and opinion.

Standard VI: conflicts of interest require disclosure of compensation, referral fees, and other arrangements that could bias advice.

Standard VII: responsibilities as a member require not misrepresenting CFA membership or candidate status.

Gifts and entertainment: accepting benefits that could impair independence violates the Code; modest gifts from clients are permissible with disclosure.

Investment policy statement (IPS) records objectives (return and risk), constraints (liquidity, time horizon, taxes, legal, unique), and review procedures.

Risk tolerance combines ability (financial capacity) and willingness (psychological attitude); when they conflict, the lower of the two governs the plan.

Asset allocation explains most of a diversified portfolio's return variability; security selection and market timing contribute less.

Diversification reduces unsystematic risk; systematic (market) risk remains and is compensated with a risk premium.

CAPM: expected return = risk-free rate + beta x (market return - risk-free rate); beta measures sensitivity to market moves.

Sharpe ratio = (portfolio return - risk-free rate) / standard deviation; it measures excess return per unit of total risk.

Correlation below 1 between assets lowers portfolio volatility; the lower the correlation, the greater the diversification benefit.

Rebalancing restores target weights and enforces a sell-high, buy-low discipline; it can be calendar-based or threshold-based.

Client communication must distinguish past performance from expected returns and disclose fees, risks, and conflicts in plain language.