CMA Securities & Investment cheat sheet

Canadian securities regulation is layered: provincial and territorial securities acts, CSA national instruments, and SRO rules (CIRO) operate together; a dealer must satisfy every applicable layer.

Registration categories determine permitted activity: dealing, advising, and managing each require the corresponding registration; an unregistered person may not trade or advise on securities.

Know-your-client, suitability, and conflict-of-interest rules derive from NI 31-103; conflicts must be identified, disclosed, and where possible avoided or controlled.

Prospectus requirement: distributions of securities require a receipted prospectus unless a prospectus exemption applies (accredited investor, private issuer, family/friends, minimum amount).

Continuous disclosure for reporting issuers includes annual and interim financial statements, MD&A, material change reports, and timely disclosure of material information.

Insider reporting (NI 55-104) requires filing within 10 days of becoming an insider and reporting changes in beneficial ownership.

Take-over bids under NI 62-104: 105-day minimum deposit period unless the target waives, plus prescribed disclosure and withdrawal rights.

Record-keeping and complaint handling: firms must maintain records, supervise registrants, and report certain complaints and disciplinary actions to the regulator.

Exemptions from registration and prospectus requirements are transaction-specific; relying on them requires confirming and documenting the qualifying conditions.

Fiduciary duty (where applicable) requires acting in the client's best interest, avoiding conflicts, and disclosing material conflicts that cannot be avoided.

Suitability standard: recommendation must match client objectives, risk tolerance, time horizon, financial circumstances, and knowledge; document the basis.

Priority of interests: client first, then firm/market integrity, then personal interest; personal trading must not disadvantage clients.

Prohibition on misleading communications: performance claims must be fair, balanced, and include the basis of calculation and relevant risks.

Know-your-product obligation: registrants must understand a product's structure, risk, cost, and liquidity before recommending it.

Confidentiality: client information may be used only for legitimate business purposes; disclosure requires consent or legal compulsion.

Gifts and entertainment must be within firm policy and must not create an obligation that compromises objectivity.

Whistleblowing and escalation: suspected unethical conduct should be raised internally and, if unresolved, with the regulator.

Use of discretion requires written authorization, defined parameters, and documented review of the account.

Common shares carry residual claim on assets/earnings, voting rights, and limited liability; preferred shares rank ahead for dividends and liquidation but typically lack votes.

Market capitalization = share price × shares outstanding; enterprise value = market cap + debt + preferred − cash (and equivalents).

Order types: market orders prioritize execution certainty; limit orders prioritize price certainty and may remain unfilled.

Price-weighted indices (e.g., DJIA) weight by price; cap-weighted indices weight by market value; equal-weighted indices rebalance to equal weights.

Dividend yield = annual dividend per share ÷ price; payout ratio = dividends ÷ net income.

Rights offerings allow existing holders to buy new shares pro rata, usually at a discount; a rights offering dilutes non-participants.

Share buybacks reduce shares outstanding, raising EPS for a given net income; they can also signal management's view of valuation.

Primary market issuance (IPO, secondary offering) raises capital for the issuer; secondary market trading transfers ownership without raising issuer capital.

Liquidity and spread: bid-ask spread is a transaction cost; narrower spreads generally indicate greater liquidity.

Bond price and yield move inversely; for a given change in yield, longer duration and lower coupon produce larger price changes.

Macaulay duration is the weighted average time to cash flows; modified duration ≈ Macaulay ÷ (1 + y/m) and estimates percentage price change per 1% yield change.

Convexity adjusts duration estimates: price change ≈ −D_mod × Δy + ½ × convexity × (Δy)².

Current yield = annual coupon ÷ price; yield to maturity equates all cash flows to price and assumes reinvestment at YTM.

Credit spread = bond yield − benchmark yield of comparable maturity; widening spreads signal deteriorating credit or risk aversion.

Credit ratings are opinions, not guarantees; investment grade typically BBB−/Baa3 and above; below that is high yield.

Callable bonds benefit the issuer; putable bonds benefit the investor; both features alter effective duration and yield.

Accrued interest is paid by the buyer to the seller; clean price + accrued interest = dirty (full) price.

Term structure theories: expectations, liquidity preference (upward bias), and market segmentation explain yield curve shape.

A derivative's value derives from an underlying; main types are forwards, futures, options, and swaps.

Futures are standardized and exchange-traded with daily mark-to-market and margin; forwards are customized OTC contracts with counterparty risk.

Call option gives the buyer the right (not obligation) to buy at strike; put gives the right to sell; the buyer pays premium, the writer receives it.

Intrinsic value of a call = max(S − K, 0); of a put = max(K − S, 0); time value = premium − intrinsic value.

Put-call parity (European, no dividends): C − P = S − K × e^(−rT); violations create arbitrage opportunities.

Delta measures change in option price per $1 change in underlying; gamma measures change in delta; theta is time decay; vega is volatility sensitivity.

Structured notes combine a bond with a derivative overlay; principal protection is typically conditional on issuer creditworthiness and holding to maturity.

Interest rate swaps exchange fixed for floating payments; a plain vanilla swap's value reflects the difference between fixed and expected floating rates.

Leverage amplifies both gains and losses; derivative positions require monitoring of margin, collateral, and counterparty exposure.

Expected portfolio return = weighted average of asset expected returns; portfolio risk depends on covariances, not just individual volatilities.

Diversification reduces unsystematic risk; systematic (market) risk remains and is measured by beta.

CAPM: E(R) = Rf + β × (Rm − Rf); beta = Cov(Ri, Rm) ÷ Var(Rm).

Sharpe ratio = (Rp − Rf) ÷ σp; Treynor ratio = (Rp − Rf) ÷ βp; Jensen's alpha = Rp − [Rf + β(Rm − Rf)].

Asset allocation typically explains more of return variability than security selection; strategic allocation sets long-term targets, tactical tilts are short-term.

Efficient frontier: portfolios offering the highest expected return for a given risk; the optimal portfolio depends on the investor's risk aversion.

Rebalancing restores target weights; it can reduce risk drift and may create a rebalancing premium in volatile markets.

Time-weighted return removes the effect of cash flows and measures manager performance; money-weighted return reflects the investor's actual experience.

Risk tolerance combines willingness and ability to bear risk; the lower of the two generally governs the recommendation.

Balance sheet identity: Assets = Liabilities + Shareholders' equity; it is a snapshot at a point in time.

Income statement measures performance over a period; revenue − expenses = net income; EPS = net income ÷ weighted average shares.

Cash flow statement reconciles net income to cash; operating, investing, and financing sections; free cash flow = CFO − capital expenditures.

Current ratio = current assets ÷ current liabilities; quick ratio excludes inventory; both assess short-term liquidity.

Debt-to-equity = total debt ÷ equity; interest coverage = EBIT ÷ interest expense; both assess leverage and solvency.

ROE = net income ÷ average equity; DuPont: ROE = net margin × asset turnover × equity multiplier.

Revenue recognition: recognize when performance obligations are satisfied and control transfers, not necessarily when cash is received.

P/E = price ÷ EPS; P/B = price ÷ book value per share; EV/EBITDA compares enterprise value to operating cash earnings.

DCF value = sum of discounted free cash flows plus terminal value; the discount rate should reflect the risk of the cash flows.

Trade lifecycle: order entry, execution, confirmation, clearing, settlement, and custody; each stage has distinct risk controls.

Settlement in Canada for equities typically occurs on a T+1 basis; fails to settle carry buy-in and compensation risk.

Clearing houses novate trades, becoming counterparty to both sides; margin and default funds mutualize and manage counterparty risk.

Best execution requires considering price, speed, likelihood of execution, size, and total cost, not price alone.

Order handling rules require prompt and accurate execution, fair allocation of fills, and prohibition of front-running client orders.

Segregation of client assets from firm assets protects clients on insolvency; reconciliation and custody controls are essential.

Short selling requires locating or borrowing securities; naked short selling is prohibited; settlement must occur by the prescribed deadline.

Corporate actions (dividends, splits, mergers) require position adjustments, entitlement calculations, and reconciliation.

Operational risk includes failed trades, system outages, and human error; controls include pre-trade limits, reconciliation, and business continuity plans.

Suitability assessment requires collecting KYC information: objectives, risk tolerance, time horizon, income, net worth, liquidity needs, and knowledge.

Recommendations must be suitable at the time made and reassessed when client circumstances or the account change materially.

Risk disclosure must be clear and specific; clients must understand costs, conflicts, liquidity, and potential loss before investing.

Fee and cost disclosure: clients must be told about commissions, trailing fees, and other compensation that may create conflicts.

Sales conduct prohibits high-pressure tactics, misrepresentation, unauthorized trading, and churning (excessive trading to generate commissions).

Account types and authority: cash vs margin, discretionary vs non-discretionary, and joint account authority must be documented and confirmed.

Complaint handling: firms must record, investigate, and respond to complaints within prescribed timelines and retain records.

Marketing and advertising must be fair and not misleading; hypothetical or past performance must be presented with appropriate caveats.

Vulnerable clients and diminished capacity require heightened care, documented instructions, and possible escalation to compliance.