Financial Products, Markets, and Investment Fundamentals
The building blocks
Candidates must know the main asset classes (cash, fixed income, equities, property, alternatives), the difference between debt and equity, and the risk-return relationship. Understand the characteristics of collective investment schemes, exchange-traded funds, derivatives, structured products, and insurance-wrapped products, including their liquidity, cost, and counterparty features.
Core concepts to master
- Risk types: market, credit, liquidity, concentration, inflation, currency, and counterparty risk.
- Return components: income, capital growth, and total return; nominal versus real return.
- Diversification: reduces unsystematic risk, not systematic risk.
- Bond mechanics: price moves inversely to yield; duration measures sensitivity; credit spread reflects default perception.
- Equity fundamentals: earnings, valuation multiples, dividends, and voting rights.
- Derivatives: used to hedge or speculate; leverage magnifies both gains and losses; margin and counterparty exposure matter.
- Costs: initial, ongoing, transaction, and exit charges reduce net return.
Traps that appear in questions
- Assuming diversification eliminates all risk.
- Confusing nominal with real returns when inflation is material.
- Forgetting that a bond's price falls when yields rise.
- Treating a structured product as capital-protected when protection is conditional on an issuer's solvency.
- Ignoring liquidity mismatch between the product and the client's horizon.
- Confusing a fund's historic yield with a guaranteed return.
Rule of thumb
Match the product to the purpose: horizon, liquidity need, currency, and loss tolerance. If a product cannot be explained in plain language, including how it makes and loses money, it is not yet suitable for recommendation.
Worked example
A client holds a five-year bond bought at par with a 4% coupon. Yields rise to 6%. The bond's price falls so its yield matches the market. The client still receives the coupon, but a sale before maturity realises a capital loss, illustrating inverse price-yield and duration risk.