CISI Introduction to Securities and Investment cheat sheet

UK regulators: the FCA regulates conduct and market integrity for all firms; the PRA prudentially regulates banks, insurers and major investment firms (dual-regulated where both apply).

The Bank of England's Financial Policy Committee identifies systemic risk; the Prudential Regulation Committee sits within the PRA, and the Payment Systems Regulator is a separate economic regulator.

Statutory objectives of the FCA: protecting consumers, protecting and enhancing market integrity, and promoting effective competition in consumers' interests.

The Financial Services and Markets Act 2000 (FSMA) provides the statutory framework; the Financial Services Act 2012 created the FCA/PRA twin-peaks structure, and the Financial Services and Markets Act 2023 added a secondary competitiveness objective.

Senior Managers and Certification Regime: Senior Managers hold prescribed responsibilities with statements of responsibilities; Certification staff are assessed annually by the firm; all staff are subject to Conduct Rules.

Six Treating Customers Fairly outcomes cover culture, product design, clear information, suitable advice, products meeting expectations, and no post-sale barriers to switching or claiming.

Financial Ombudsman Service: free to consumers, awards generally capped (limit set periodically), decisions binding on the firm but not on the complainant, who may still go to court.

Financial Services Compensation Scheme: protects deposits, investments and insurance; limits are per person per firm and differ by product type (e.g. deposits and investments have separate limits).

Market abuse under MAR comprises insider dealing, unlawful disclosure, market manipulation and attempted manipulation; behaviours include spoofing, layering and benchmark manipulation.

GDP measured by expenditure = C + I + G + (X − M); real GDP strips out inflation using a deflator, nominal GDP does not.

Inflation measured by CPI (consumer prices, includes owner-occupier housing costs in CPIH) versus RPI (broader, includes mortgage interest and council tax); the Bank of England targets CPI at 2%.

Interest rate transmission: higher policy rates raise borrowing costs, depress bond prices, support the currency and typically cool demand and inflation with a lag.

Yield curve shapes: normal upward-sloping (longer maturities yield more), inverted (short rates above long, often before recession), and flat; expectations theory, liquidity preference and segmentation explain shape.

Monetary policy tools: policy rate, quantitative easing (asset purchases expanding reserves) and quantitative tightening (reducing the balance sheet); fiscal policy uses taxation and public spending.

Exchange rates: a stronger currency lowers import prices (reducing inflation) but hurts exporters; purchasing power parity and interest-rate differentials are long-run drivers.

Business cycle phases: expansion, peak, contraction/recession, trough; leading indicators (yield curve, PMIs), coincident indicators (industrial output) and lagging indicators (unemployment) differ in timing.

Elasticity: price elasticity of demand = % change in quantity ÷ % change in price; demand is elastic when the absolute value exceeds 1, inelastic when below 1.

Ordinary shares confer voting rights, a residual claim on profits via dividends, and limited liability; preference shares rank ahead for dividends and capital but usually carry no vote.

Dividend cover = earnings per share ÷ dividend per share; a higher cover indicates greater safety of the dividend. Payout ratio = dividend per share ÷ earnings per share.

Dividend yield = dividend per share ÷ share price; earnings yield = EPS ÷ price, which is the inverse of the P/E ratio.

P/E ratio = share price ÷ EPS; a high P/E implies the market expects growth or perceives low risk, and can also signal overvaluation.

Market capitalisation = share price × number of shares in issue; free-float market cap excludes strategic or restricted holdings.

Rights issue: existing holders may buy new shares at a discount in proportion to holdings; the theoretical ex-rights price = (market value before + new money raised) ÷ total shares after.

Scrip issue (bonus issue) and share split increase share count without raising cash; a share consolidation does the reverse. A buyback reduces shares in issue and can raise EPS.

Corporate actions affecting price: ex-dividend date (price typically falls by the dividend), stock splits, and takeover offers in cash, shares or a mix.

Investment styles: value (low P/E, high yield) versus growth (high P/E, rising earnings); small-cap versus large-cap; defensive sectors versus cyclical sectors.

Bond price and yield move inversely: when yields rise, prices fall. Price sensitivity rises with longer maturity and lower coupon, measured by duration.

Clean price excludes accrued interest; dirty (full) price = clean price + accrued interest. Accrued interest = coupon × days since last coupon ÷ days in coupon period.

Yield to maturity equates the present value of all future coupons and redemption proceeds to the current price; it assumes coupons are reinvested at the same rate.

Current yield = annual coupon ÷ clean price; it ignores capital gain or loss to redemption and is therefore a rough measure only.

Duration (Macaulay) is the weighted average time to cash flows; modified duration ≈ Macaulay duration ÷ (1 + yield), and % price change ≈ −modified duration × change in yield.

Credit ratings: investment grade is BBB−/Baa3 and above; below that is sub-investment-grade (high yield). A fallen angel is a bond downgraded from investment grade to high yield.

Gilt types: conventional (fixed coupon), index-linked (coupon and principal adjusted for inflation, usually RPI), and strips (separated coupons and principal).

Redemption structures: bullet (single redemption date), callable (issuer may redeem early), puttable (holder may require early redemption), convertible (exchangeable into shares), and perpetual (no fixed maturity).

A derivative's value derives from an underlying asset; the four main types are futures/forwards, options, swaps and contracts for difference.

Futures are exchange-traded, standardised and margined daily; forwards are OTC, bespoke and carry counterparty credit risk.

Call option gives the buyer the right, not the obligation, to buy at the strike; put gives the right to sell. The buyer pays a premium; the writer receives it and bears the obligation.

Option moneyness: in-the-money (intrinsic value positive), at-the-money (strike ≈ market price), out-of-the-money (no intrinsic value; premium is time value only).

Intrinsic value for a call = max(0, underlying − strike); for a put = max(0, strike − underlying). Option premium = intrinsic value + time value.

Interest rate swap: exchange fixed for floating interest payments on a notional principal; the notional is not exchanged, so credit exposure is far smaller than the notional.

Hedging uses derivatives to offset risk (e.g. a portfolio manager sells index futures to reduce equity exposure); speculation takes a directional position; arbitrage exploits mispricing between related instruments.

Margin: initial margin is posted at trade inception; variation margin settles daily gains and losses. A margin call arises when equity falls below the maintenance level.

A contract for difference pays the difference between opening and closing price; it offers leverage but no ownership of the underlying and incurs financing charges on long positions.

An open-ended fund issues and redeems units at (approximately) net asset value, so its price tracks NAV; a closed-ended fund has a fixed share count and trades at a premium or discount to NAV.

NAV per share = (total assets − total liabilities) ÷ number of shares or units in issue.

UCITS funds are EU/UK retail schemes subject to diversification and liquidity rules and may be marketed cross-border; non-UCITS schemes face fewer restrictions but less passporting.

UK fund structures include authorised unit trusts (units, trustee oversight), open-ended investment companies (OEICs, single price, company structure) and investment trusts (closed-ended companies).

Pricing: dual pricing has separate bid and offer prices with a spread; single pricing uses one price with a dilution levy or swing pricing to protect existing investors from dealing costs.

Annual management charge is a percentage of fund value; the ongoing charges figure (OCF) captures the AMC plus other ongoing costs but excludes dealing commissions and performance fees.

Active versus passive: passive (index-tracking) funds aim to match an index at low cost; tracking error measures deviation from the benchmark, tracking difference measures return shortfall.

Exchange-traded funds trade intraday like shares; they may be physically backed or synthetic (using swaps), and can trade at a premium or discount to NAV.

Hedge fund features may include performance fees, lock-up periods, gates, high minimum investment and use of leverage and short selling; they are typically aimed at professional or high-net-worth investors.

Risk tolerance (attitude to risk) is the client's willingness to accept risk; risk capacity is the financial ability to bear losses; capacity can cap the risk actually taken.

Asset allocation typically drives most of a portfolio's return variability; diversification reduces unsystematic risk but cannot remove systematic (market) risk.

Correlation between assets ranges from −1 to +1; combining assets with correlation below +1 reduces portfolio volatility for a given level of expected return.

The efficient frontier plots portfolios offering the highest expected return for each level of risk; the optimal portfolio also depends on the client's risk tolerance.

Time horizon matters: longer horizons allow more equity exposure because short-term volatility has time to be absorbed; short horizons favour cash and short-dated bonds.

Compounding: future value = present value × (1 + r)^n; real return ≈ nominal return − inflation (exact: (1+nominal) ÷ (1+inflation) − 1).

Suitability: advice must reflect the client's objectives, attitude to risk, capacity for loss, financial circumstances, knowledge and experience, and tax position.

Pension and tax wrappers: ISAs, pensions and other wrappers have distinct tax treatment and access rules; contributions and withdrawals should be sequenced to match the client's needs.

Emergency fund planning typically sets aside several months of essential expenditure in accessible, low-volatility assets before longer-term investing.

Know your client (KYC) and anti-money-laundering (AML) checks identify the client, verify identity and establish source of funds and source of wealth before business is transacted.

Client money rules require client assets and money to be held separately from the firm's own, with reconciliation and records to permit prompt return on insolvency.

Best execution requires firms to take all sufficient steps to obtain the best possible result for clients, considering price, cost, speed, likelihood of execution and settlement.

Conflicts of interest must be identified, prevented or managed, and disclosed where management is insufficient; inducements must not impair the duty to act in the client's best interests.

Chinese walls and information barriers restrict the flow of confidential or inside information between departments; personal account dealing is restricted and monitored.

Suitability reports should record the client's objectives, the recommendation, why it is suitable, and the risks and costs involved; record-keeping supports later review.

Complaints handling: firms must resolve complaints promptly and fairly, with defined time limits and referral rights to the Financial Ombudsman Service if unresolved.

Ethical standards: integrity, fair treatment of customers, professional competence, confidentiality and market conduct; the client's interests rank ahead of the firm's remuneration.

Data protection: personal data must be processed lawfully and transparently, kept accurate and secure, and retained only as long as necessary.