CISI Introduction to Securities and Investment flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

FCA objectives

The Financial Conduct Authority has three statutory objectives: protecting consumers, protecting and enhancing market integrity, and promoting effective competition in consumers' interests.

Dual regulation

Banks, insurers and major investment firms are prudentially regulated by the PRA and conduct-regulated by the FCA, so both regulators apply to the same firm.

Senior Managers Regime

A regime requiring named senior individuals to hold prescribed responsibilities and statements of responsibilities, making accountability for decisions explicit within the firm.

FSCS protection

The compensation scheme that pays eligible claimants when an authorised firm fails, with limits set per person per firm and differing by product type.

Market abuse

Behaviour including insider dealing, unlawful disclosure of inside information, and market manipulation such as spoofing, layering or benchmark manipulation, which damages market integrity.

Real versus nominal GDP

Nominal GDP is measured at current prices; real GDP adjusts for inflation using a deflator, so it reflects changes in actual output volume.

Inverted yield curve

A curve where short-term interest rates exceed long-term rates, often interpreted as a signal of expected economic slowdown or recession.

Quantitative easing

Central bank purchases of assets, usually government bonds, that expand the central bank balance sheet and inject reserves to lower longer-term yields and support demand.

Price elasticity of demand

The percentage change in quantity demanded divided by the percentage change in price; demand is elastic when the absolute value exceeds one and inelastic when below one.

Dividend cover

Earnings per share divided by dividend per share, showing how many times earnings cover the dividend; higher cover generally indicates a safer dividend.

P/E ratio

Share price divided by earnings per share; a high multiple implies expected earnings growth or low perceived risk, and may also indicate overvaluation.

Theoretical ex-rights price

The market value of existing shares plus the cash raised from the rights issue, divided by the total number of shares after the issue.

Preference shares

Shares ranking ahead of ordinary shares for dividends and return of capital, usually with a fixed dividend and normally without voting rights.

Scrip issue

A bonus issue of free shares to existing holders, increasing the number of shares in issue without raising new cash; the share price adjusts proportionately.

Clean versus dirty price

The clean price excludes accrued interest; the dirty or full price is the clean price plus interest accrued since the last coupon payment date.

Yield to maturity

The discount rate that equates the present value of a bond's future coupons and redemption proceeds to its current price, assuming coupons are reinvested at that rate.

Modified duration

A measure of a bond's price sensitivity to yield changes; the approximate percentage price change equals minus modified duration times the change in yield.

Investment grade

A credit rating of BBB minus or Baa3 and above, indicating lower default risk than sub-investment-grade or high-yield bonds.

Fallen angel

A bond originally rated investment grade that has been downgraded to sub-investment-grade status, often forcing index funds to sell it.

Index-linked gilt

A UK government bond whose coupon and principal are adjusted for inflation, typically by reference to the retail prices index.

Option intrinsic value

For a call, the underlying price minus the strike when positive; for a put, the strike minus the underlying price when positive; otherwise zero.

Futures versus forwards

Futures are exchange-traded, standardised and margined daily; forwards are over-the-counter, bespoke contracts carrying counterparty credit risk.

Interest rate swap

An agreement to exchange fixed and floating interest payments on a notional principal; the principal itself is not exchanged, limiting credit exposure.

Variation margin

Cash settled daily between counterparties or clearing members to reflect gains and losses on open positions, preventing losses from accumulating.

Hedging versus speculation

Hedging uses derivatives to offset existing risk; speculation takes a directional position seeking profit and increases risk exposure.

Net asset value

A fund's total assets minus total liabilities, divided by the number of shares or units in issue to give a per-unit value.

Open versus closed-ended

Open-ended funds issue and redeem units at about net asset value; closed-ended funds have a fixed share count and trade at premiums or discounts to NAV.

Ongoing charges figure

A percentage summarising a fund's annual management charge and other ongoing costs, excluding dealing commissions and performance fees.

UCITS

A retail collective investment scheme meeting diversification and liquidity rules that may be marketed across borders to investors in participating jurisdictions.

Risk tolerance versus capacity

Tolerance is the client's willingness to accept risk; capacity is the financial ability to withstand losses, and it can cap the risk actually taken.

Correlation

A measure from minus one to plus one of how two assets' returns move together; combining assets with correlation below plus one reduces portfolio volatility.

Best execution

The obligation to take all sufficient steps to obtain the best possible result for clients, considering price, cost, speed, execution likelihood and settlement.