ICWIM cheat sheet

The financial system channels funds from savers (surplus units) to borrowers (deficit units) via intermediaries such as banks, insurers and fund managers, or directly via markets.

Primary market issuance raises new capital for the issuer; secondary market trading transfers existing securities between investors and does not raise new money for the issuer.

Typical regulatory objectives: maintaining market confidence, promoting financial stability, securing appropriate consumer protection, and reducing financial crime.

Client categorisation under conduct rules: retail, professional and eligible counterparty - the level of protection and disclosure falls as the client becomes more sophisticated.

Anti-money laundering: customer due diligence (identification and verification) must be completed before a business relationship is established; suspicious activity is reported to the financial intelligence unit.

Deposit guarantee and investor compensation schemes cover eligible claims up to a stated cap per depositor per institution, or per investor per firm.

Market abuse comprises insider dealing, unlawful disclosure of inside information and market manipulation; all are criminal or civil offences.

Prudential regulation focuses on a firm's capital, liquidity and risk controls; conduct regulation focuses on how the firm treats customers and markets.

Core ethical principles cited in professional codes: integrity, objectivity, competence, confidentiality, professionalism and compliance with applicable law.

A structured ethical decision process: establish the facts, identify stakeholders, identify relevant rules and values, consider alternatives, weigh consequences, decide, act and review.

Conflicts of interest must be identified, then avoided, managed (segregation, Chinese walls, disclosure) or declined; the client's interest ranks ahead of the firm's own interest.

Inducements: a commission or non-cash benefit must not impair the duty to act in the client's best interest and must be disclosed to the client.

Inside information is precise, non-public and price-sensitive; dealing on it, or encouraging or disclosing it to others, is prohibited.

Confidentiality: client information may be shared only with the client's consent or where disclosure is legally required, and only on a need-to-know basis.

Competence: an adviser should act only within their knowledge and experience, keep technical knowledge current, and escalate or refer when outside their competence.

Whistleblowing protections generally apply to a worker who reports wrongdoing in good faith through prescribed internal or regulatory channels.

Cash and money market instruments have original maturities of one year or less and carry low price risk but credit and inflation risk.

Bond price and yield move inversely: price = present value of future coupons and redemption proceeds discounted at the required yield.

Duration approximates the percentage price change for a 1% change in yield: %ΔP ≈ −modified duration × Δyield.

Equities give a residual claim on earnings and assets after creditors, plus voting rights; dividends are discretionary.

Property is illiquid, has high transaction costs and lumpy lot sizes, and valuations are appraisal-based, which smooths reported volatility.

Alternative assets (hedge funds, private equity, commodities, infrastructure) often show low correlation with mainstream assets but carry illiquidity and higher fees.

Derivatives - futures, forwards, options and swaps - provide leverage and can be used to hedge or to speculate; a forward is an obligation, an option is a right.

Correlation below +1 reduces portfolio risk; the lower the correlation between assets, the greater the diversification benefit for a given level of expected return.

Open-ended funds (unit trusts, OEICs, SICAVs) issue and redeem units on demand at net asset value, so the number of units in issue varies.

A unit trust is dual-priced (offer/bid with a spread); an OEIC is generally single-priced with an explicit charge.

An investment trust is a closed-ended company: its shares trade on an exchange and may stand at a premium or discount to net asset value, and it can borrow (gear).

An ETF tracks an index, trades intraday like a share, typically has a low total expense ratio, and carries tracking error and, for synthetic structures, counterparty risk.

Hedge funds commonly charge a management fee plus a performance fee and impose lock-up periods and periodic redemption windows.

Structured products combine a deposit or note with derivatives to deliver capital protection or enhanced participation; the investor bears issuer counterparty risk.

Money market funds hold short-dated, high-quality debt and aim for a constant or low-volatility net asset value.

Pension arrangements typically give tax relief on contributions, tax-deferred growth and taxable income on withdrawal; the exact treatment is jurisdiction-specific.

Discounted cash flow: value = Σ CFt/(1+r)^t plus a terminal value; the discount rate should reflect the risk of the cash flows.

Gordon growth model: P0 = D1/(r − g), valid only where the growth rate g is below the required return r.

Price-earnings ratio = price per share ÷ earnings per share; the earnings yield is its reciprocal, EPS ÷ price.

Dividend yield = dividend per share ÷ price per share; it captures the income component but not total return.

Bond price = Σ C/(1+y)^t + F/(1+y)^n; yield to maturity is the internal rate of return of those cash flows.

Fisher relationship: real return = (1 + nominal) ÷ (1 + inflation) − 1, approximated as nominal minus inflation.

NPV rule: accept a project with positive NPV; IRR rule: accept if IRR exceeds the cost of capital, but IRR can mislead with non-conventional cash flows or scale differences.

Fundamental analysis values an asset from its economics (earnings, cash flow, balance sheet); technical analysis uses price and volume patterns and ignores intrinsic value.

Total risk = systematic (market) risk + unsystematic (specific) risk; unsystematic risk is largely removed by holding roughly 20–30 well-spread equities.

CAPM: E(R) = Rf + β(E(Rm) − Rf); beta measures sensitivity to market movements.

Sharpe ratio = (Rp − Rf) ÷ σp, using total risk; Treynor ratio = (Rp − Rf) ÷ β, using systematic risk.

Jensen's alpha = Rp − [Rf + β(Rm − Rf)]; a positive alpha indicates return above that predicted by CAPM.

Strategic asset allocation sets long-term target weights by asset class; tactical asset allocation makes shorter-term deviations from those weights.

Rebalancing back to target weights can be calendar-based or threshold-based and controls the drift in portfolio risk.

The efficient frontier plots portfolios offering the highest expected return for each level of risk; the minimum-variance portfolio is its leftmost point.

An investment policy statement records objectives, risk tolerance, constraints (liquidity, time horizon, tax, legal, unique) and the review cycle.

Advisory cycle: establish the relationship, gather client data, analyse the position, recommend, implement, then monitor and review.

Risk tolerance combines willingness to take risk (attitude) and ability to bear loss (time horizon, income stability, net worth).

A suitability assessment must match the recommendation to the client's objectives, risk profile, knowledge, experience and financial situation.

Know-your-client data: identity, dependants, income and expenditure, assets and liabilities, existing arrangements, objectives and attitude to risk.

Protection planning typically precedes investment planning: income protection, life cover and critical illness cover address risks that investments cannot.

A cash emergency reserve of roughly three to six months' expenditure is a common planning benchmark before committing funds to longer-term investments.

The life-cycle model runs accumulation, consolidation, spending (decumulation) and gifting phases, with risk capacity generally falling over time.

A written record of advice should document the client's circumstances, the recommendation, alternatives considered and the client's decision.

Main tax heads affecting investors: income tax, capital gains tax, inheritance tax and transaction taxes such as stamp duty.

Tax wrappers (ISAs, pensions, insurance bonds) shelter or defer tax; a tax-exempt wrapper removes tax on income and gains, a tax-deferred wrapper postpones the charge.

Capital gain = disposal proceeds − allowable cost − allowable expenses; an annual exemption often removes a fixed amount of gain from charge.

Inheritance tax: lifetime gifts may be potentially exempt transfers, becoming fully exempt if the donor survives seven years, with taper relief on tax between three and seven years.

Domicile and residence determine the scope of a person's tax liability; double taxation treaties allocate taxing rights and grant relief.

Withholding tax is deducted at source on dividends and interest; treaty relief or a reclaim process can reduce it, and some wrappers reclaim it.

Tax-efficient planning uses annual allowances, tax wrappers, loss offsetting and the timing of disposals - all within the law; evasion is illegal, avoidance is legal structuring.

Sharia-compliant investing prohibits riba (interest), gharar (excessive uncertainty) and gambling, excludes certain sectors, and uses profit-sharing or leasing structures.