SIAA Securities & Managed Investments cheat sheet

Primary market: issuer raises new capital via IPOs, follow-on offerings, or private placements; proceeds go to the issuer, not to selling holders.

Secondary market: investors trade existing securities among themselves; proceeds go to the seller, and the issuer receives nothing.

Order types: market order executes at best available price; limit order executes only at a specified price or better; stop order becomes a market order once a trigger price is hit.

Bid-ask spread is the implicit transaction cost; a wider spread indicates lower liquidity and higher dealer compensation for inventory risk.

Price discovery is the process by which trading activity aggregates dispersed information into a market-clearing price.

Settlement cycle: trade date plus settlement date (commonly T+1 or T+2 for equities); failure to settle is a counterparty/settlement risk.

Market indices may be price-weighted (higher-priced stocks dominate), capitalization-weighted (larger firms dominate), or equal-weighted (each constituent rebalanced to equal weight).

Short selling involves borrowing securities, selling them, and later buying them back to return; losses are theoretically unlimited because price can rise without bound.

Typical participants: issuers, investors (retail and institutional), brokers, dealers, investment advisers, fund managers, custodians, transfer agents, and exchanges/alternative trading venues.

Broker acts as agent for the client; dealer acts as principal trading from its own inventory; the distinction drives disclosure and best-execution obligations.

Fiduciary duty (adviser) requires acting in the client's best interest; a suitability standard requires only that a recommendation be appropriate for the client.

Custodian safeguards client assets and settles trades; segregation of client assets from firm assets is a core investor-protection control.

Regulators typically separate prudential/solvency supervision from market-conduct supervision; self-regulatory organizations may also set and enforce rules.

Registration/licensing of firms and representatives is a precondition to conducting regulated activity; unregistered activity is a common enforcement target.

Disclosure regimes require prospectuses and ongoing reporting so investors can assess risk; misleading statements create civil and criminal liability.

Conflicts of interest must be identified, disclosed, and managed (e.g., via information barriers, restricted lists, or declining the business).

Ordinary shares confer residual ownership: voting rights and a claim on dividends and liquidation proceeds after all creditors and preferred holders.

Preference shares rank ahead of ordinary shares for dividends and liquidation but typically carry limited or no voting rights; they may be cumulative or non-cumulative.

Dividend metrics: dividend yield = annual dividend per share ÷ price per share; payout ratio = dividends ÷ earnings; dividend cover = earnings ÷ dividends.

P/E ratio = price per share ÷ earnings per share; a high P/E implies the market expects higher future growth or reflects lower perceived risk.

Rights issue: existing holders receive the right to buy new shares, usually at a discount; the theoretical ex-rights price blends old and new shares.

Stock split increases share count and lowers per-share price without changing market capitalization or shareholder ownership percentage.

Convertible bonds and depositary receipts are equity-linked: convertibles pay coupon but convert into shares; depositary receipts represent shares held in custody.

Total return to a shareholder = price change + dividends received, expressed as a percentage of the initial price.

Bond price and yield move inversely: when market yields rise, fixed-coupon bond prices fall, and vice versa.

Price-yield relationship is convex: for a given yield change, the price gain is larger than the price loss, all else equal.

Duration measures price sensitivity to yield: approximate percentage price change ≈ −modified duration × change in yield (in decimal).

Macaulay duration is the weighted average time to cash flows; modified duration = Macaulay duration ÷ (1 + yield per period).

Money market instruments (T-bills, commercial paper, certificates of deposit, repos) are short-term, highly liquid, and typically discounted or interest-bearing with maturities up to one year.

Credit spread = yield on a corporate bond − yield on a comparable government bond; widening spreads signal rising perceived credit risk.

Yield curve shapes: normal (upward sloping), inverted (downward sloping), and flat; inversion often signals expectations of falling rates or weaker growth.

Callable bonds benefit the issuer (redeem early if rates fall); puttable bonds benefit the investor (sell back if rates rise).

Open-ended funds issue and redeem units at net asset value (NAV) on demand; closed-ended funds have a fixed number of shares traded on an exchange, often at a premium or discount to NAV.

NAV per unit = (total assets − total liabilities) ÷ number of units outstanding, typically valued at the close of each dealing day.

Unit trusts and OEICs pool investor money; the manager makes investment decisions while the depositary/trustee safeguards assets and oversees compliance.

Ongoing charges figure (OCF) captures annual management and operating costs as a percentage of fund assets; entry and exit charges are separate.

Index (passive) funds track a benchmark at low cost; active funds aim to beat a benchmark and charge higher fees, with performance measured against the benchmark after costs.

Hedge funds may use leverage, short selling, and performance fees; they are typically offered to professional/qualified investors under private placement rules.

Exchange-traded funds combine pooled exposure with intraday exchange trading; tracking difference reflects fees and implementation costs versus the index.

Diversification reduces unsystematic (specific) risk but cannot eliminate systematic (market) risk, which affects all securities.

A derivative's value derives from an underlying asset, rate, index, or event; the four main types are forwards, futures, options, and swaps.

Futures are standardized and exchange-traded with daily mark-to-market and margin; forwards are customized OTC contracts with counterparty credit risk.

Option buyer pays a premium and has a right, not an obligation; the writer receives the premium and bears the obligation if the option is exercised.

Intrinsic value: call = max(0, underlying price − strike); put = max(0, strike − underlying price); time value = premium − intrinsic value.

Put-call parity (European options, no dividends): call − put = underlying price − strike ÷ (1 + risk-free rate)^T.

Structured products combine a bond with a derivative payoff; capital-protected notes limit downside while capping upside, and issuer credit risk remains.

Alternatives include private equity, real estate, hedge funds, and commodities; they may offer diversification but often feature illiquidity, leverage, and valuation uncertainty.

Leverage magnifies both gains and losses; a margin call occurs when equity in the account falls below the required maintenance level.

Expected portfolio return = weighted average of asset expected returns: E(Rp) = Σ wi × E(Ri).

Portfolio variance depends on weights, individual variances, and pairwise covariances; lower correlation reduces portfolio risk for the same expected return.

Standard deviation measures total risk; beta measures sensitivity to market movements: beta = covariance(asset, market) ÷ variance(market).

Capital Asset Pricing Model: required return = risk-free rate + beta × (market return − risk-free rate).

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

Strategic asset allocation sets long-term target weights based on objectives and risk tolerance; tactical allocation makes shorter-term deviations from those targets.

Risk tolerance combines willingness (psychological) and ability (financial capacity) to bear losses; the binding constraint is the lower of the two.

Rebalancing restores target weights, controlling drift in risk exposure; it can be calendar-based or threshold-based.

Suitability assessment considers the client's objectives, time horizon, risk tolerance, financial circumstances, knowledge, and experience.

Know-your-client (KYC) information must be gathered before advice and updated when circumstances change materially.

Risk profiling tools produce a client risk score; the recommended portfolio's risk level should not exceed the client's assessed tolerance.

Diversification and concentration limits are suitability controls: an over-concentrated portfolio in one issuer or sector raises specific risk.

Costs and charges must be disclosed before a recommendation, since they reduce net return and can make a product unsuitable for a given objective.

Product risk-reward ratings (e.g., 1–7 scales) are matched against client risk profiles; a mismatch requires documented justification or a different product.

Vulnerable clients (e.g., those with diminished capacity or limited financial literacy) require enhanced care, clearer communication, and careful record-keeping.

Record-keeping should capture the client information relied on, the advice given, the rationale, and the client's decision to proceed.

Insider dealing: trading or disclosing inside information (non-public, price-sensitive) is prohibited; controls include restricted lists, wall-crossing procedures, and personal-dealing rules.

Market manipulation includes wash trades, spoofing (orders placed with intent to cancel), and dissemination of false or misleading information.

Best execution requires taking reasonable steps to obtain the best available outcome for clients, considering price, cost, speed, and likelihood of execution.

Client order handling rules require prompt and fair execution and prohibit front-running (trading ahead of a known client order).

AML framework: customer due diligence (identification and verification), ongoing monitoring, suspicious activity reporting, and record retention.

Enhanced due diligence applies to higher-risk situations such as politically exposed persons, complex ownership structures, or high-risk jurisdictions.

Tipping off (alerting a suspect that a suspicious activity report has been filed) is itself an offence; confidentiality of reports is strict.

Gifts and inducements must be disclosed and must not impair independence; inducements that bias advice are prohibited or must be clearly disclosed.