Investment Products and Their Characteristics
Core Concepts
Candidates must understand a wide range of investment products: shares, bonds (government, corporate, convertible), money market instruments (T-bills, commercial paper), collective investment schemes (UCITS, non-UCITS, ETFs), derivatives (options, futures, swaps, CFDs), and structured products (capital-protected notes, reverse convertibles). Key characteristics: risk/return profile, liquidity, maturity, issuer credit risk, and tax treatment. For each product, know the payoff structure, embedded risks, and suitability for different investor types. Traps often involve confusing similar products (e.g., ETFs vs. mutual funds, CFDs vs. futures), misunderstanding structured product capital protection (which is subject to issuer risk), and overlooking the difference between UCITS and non-UCITS funds. Also, the treatment of convertible bonds (debt with equity option) and preference shares (hybrid characteristics). Candidates should know the PRIIPs KID requirements for packaged products and the key information documents. Another trap: the distinction between open-ended and closed-ended funds, and the liquidity risks of each.
Worked Example / Rule of Thumb
A reverse convertible bond offers a higher coupon but exposes the investor to downside risk if the underlying share falls below a threshold. Rule of thumb: higher coupon often signals higher risk; always assess the embedded derivative.
Key Points
- Product types: equities, bonds, money market instruments, CIS, derivatives, structured products.
- Understand payoff structures and embedded risks.
- UCITS funds are harmonised; non-UCITS may have different rules.
- ETFs trade like shares but track an index; mutual funds price at NAV.
- Structured products may offer capital protection but carry issuer credit risk.
- PRIIPs KID required for packaged retail products.