CISI IAD Securities Technical Unit Cheat Sheet

Last revised: September 28, 2026

Cheat sheet: review support for the Chartered Institute for Securities & Investment CISI IAD Securities Technical Unit.

Use the tables for a quick pre-exam check. Expand a topic’s notes for explanations, examples, and additional distinctions.

Scope and study context

Security types and how they behave in client portfolios
Equity, bond, fund, and exchange-traded product distinctions
Core valuation formulas and calculation traps
Trading, settlement, corporate actions, and market terminology
Suitability, risk, and tax logic commonly tested in applied questions

It is not a replacement for the current Chartered Institute for Securities & Investment syllabus or workbook. It is independent companion practice support designed to help you identify what to review, where candidates commonly lose marks, and how to connect concepts to original practice questions.

A good final review cycle is:

Read one topic section from this page.
Complete topic drills from an independent question bank.
Review detailed explanations, especially for wrong answers and lucky guesses.
Write one-line rules for errors, such as “coupon is based on nominal, yield is based on price.”
Return to mixed original practice questions so you can switch topics under exam conditions.
Use mock exams only after the main topic gaps are under control.

Practice review log

Missed question type	What to record
Calculation error	Formula, units, and where the wrong figure came from
Concept error	The rule you confused
Suitability error	Client fact you ignored
Product comparison error	Feature that made the other option better
Time-pressure error	Shortcut or recognition cue to use next time

High-yield exam map

Area	What to know cold	Common exam trap
Ordinary shares	Ownership, voting, dividends, capital growth, residual risk	Assuming dividends are fixed or guaranteed
Preference shares	Fixed dividend priority over ordinary shares; often limited voting	Treating them as risk-free bonds
Bonds	Coupon, maturity, redemption, yield, duration, credit risk	Confusing coupon rate with yield
Convertibles	Bond plus equity conversion option	Ignoring dilution and conversion premium
Warrants/options	Leveraged exposure; time value; expiry	Assuming leverage only increases return, not risk
Investment trusts	Closed-ended, exchange traded, may gear, can trade at discount/premium	Treating price as always equal to NAV
OEICs/unit trusts	Open-ended pooled funds priced from NAV	Confusing dilution levy/spread with performance loss
ETFs/ETPs	Exchange-traded exposure; physical or synthetic replication	Ignoring tracking error, liquidity, counterparty risk
Corporate actions	Rights, bonus issues, splits, dividends, takeovers	Forgetting ex-date/cum-date effects
Trading	Order types, bid-offer spread, execution vs price certainty	Saying a market order gives price certainty
Suitability	Objectives, risk, time horizon, capacity for loss, tax status	Recommending product features without client fit

Security types: compact comparison

Security	Investor return	Main risks	Priority on liquidation	Best fit	Watch for
Ordinary share	Dividends and capital growth	Market, business, dividend, liquidity	Last	Growth, long horizon, risk tolerance	Volatility and no income certainty
Preference share	Usually fixed dividend; possible capital movement	Issuer, interest-rate sensitivity, liquidity	Before ordinary, after debt	Income with equity-like risk	Cumulative vs non-cumulative terms
Secured bond	Coupon and redemption	Credit, rate, inflation, liquidity	Higher than unsecured, subject to security	Income, known maturity	Security value may be insufficient
Unsecured corporate bond	Coupon and redemption	Credit/default, rate, liquidity	Below secured debt	Income with credit spread	Rating downgrade impact
Subordinated bond	Higher coupon potential	Higher default loss severity	Below senior debt	Higher income, higher risk	Not equivalent to senior debt
Gilt	Coupon and redemption from UK government	Interest-rate, inflation, reinvestment	Government obligation	Lower credit-risk fixed income	Price can still fall materially
Index-linked gilt	Inflation-adjusted coupons/principal methodology	Real-yield, inflation-index lag, rate risk	Government obligation	Inflation protection	Use stated indexation method
Zero-coupon bond	Difference between purchase price and redemption	Rate sensitivity, credit, tax timing	As debt rank states	Known future liability	High duration for maturity
Convertible bond	Coupon plus option to convert into shares	Credit, equity, dilution, rate risk	Debt until converted	Income plus equity upside	Conversion premium and parity
Warrant	Right to buy/sell underlying, often company-issued	Leverage, expiry, issuer/liquidity risk	No ownership until exercised	Speculative leveraged exposure	Can expire worthless
Structured product	Formula-linked payoff	Counterparty, market, liquidity, complexity	Depends on issuer/collateral	Defined payoff profile	Capital protection may be conditional
ETF	Market exposure traded intraday	Market, tracking, liquidity, counterparty	Fund structure dependent	Low-cost diversified exposure	Synthetic vs physical replication

Equity securities reference

Ordinary shares

Feature	Exam meaning
Ownership	Ordinary shareholders own residual interest in the company
Voting	Usually voting rights on major matters and board election
Dividend	Variable and not guaranteed; board/shareholder process depends on company rules
Capital gain/loss	Sale price can exceed or fall below purchase price
Limited liability	Shareholder loss generally limited to amount invested
Residual claim	Paid after creditors and preference shareholders on winding up

Notes and examples

Preference shares

Type	Key point
Cumulative preference	Missed dividends accumulate and must usually be paid before ordinary dividends resume
Non-cumulative preference	Missed dividends are lost unless declared
Participating preference	May receive extra dividend if company performs well
Redeemable preference	Company may redeem under stated terms
Convertible preference	Can convert into ordinary shares under stated terms
Fixed-rate preference	Sensitive to interest-rate changes like long-dated income securities

Equity ratios and valuation formulas

Use the units consistently: pence with pence, pounds with pounds, annual figures with annual figures.

\[ \text{EPS}=\frac{\text{Profit attributable to ordinary shareholders}}{\text{Weighted average ordinary shares}} \]\[ \text{Dividend yield}=\frac{\text{Annual dividend per share}}{\text{Current market price per share}}\times100 \]\[ \text{P/E ratio}=\frac{\text{Market price per share}}{\text{Earnings per share}} \]\[ \text{Earnings yield}=\frac{\text{Earnings per share}}{\text{Market price per share}}\times100 \]\[ \text{Dividend cover}=\frac{\text{Earnings per share}}{\text{Dividend per share}} \]\[ \text{NAV per share}=\frac{\text{Assets}-\text{Liabilities}}{\text{Shares in issue}} \]\[ \text{Premium or discount to NAV}=\frac{\text{Share price}-\text{NAV per share}}{\text{NAV per share}}\times100 \]

Equity ratio interpretation

Ratio	Higher suggests	Lower suggests	Trap
Dividend yield	Higher cash income relative to price	Lower income or higher price	Very high yield may signal expected dividend cut
P/E	Higher growth expectations or overvaluation	Lower expectations or undervaluation	Compare with sector, growth, risk, accounting quality
EPS	Higher profitability per share	Lower profitability or dilution	EPS can rise from buybacks even if total profit is flat
Dividend cover	Dividend better covered by earnings	Dividend may be vulnerable	Cover based on accounting profit, not cash flow
NAV discount	Share trades below asset value	Possible value or poor sentiment	Common for investment trusts; not automatic bargain
NAV premium	Market values management/access highly	May be expensive	Premium can reverse quickly

Ordinary shares

Ordinary shares represent ownership. Shareholders usually have voting rights, variable dividends, and residual claims after creditors and preference shareholders.

High-yield points:

Ordinary shareholders have upside potential but rank behind debt holders.
Dividends are not guaranteed.
Equity returns come from capital growth plus dividends.
Equity risk includes business risk, market risk, currency risk, liquidity risk, and valuation risk.
A company can be profitable but still experience a falling share price if expectations deteriorate.

Preference shares

Preference shares often pay a fixed dividend and rank ahead of ordinary shares for dividends and capital repayment, but behind debt.

Feature	Exam relevance
Fixed dividend	Can resemble income investment, but payment may still depend on distributable profits
Priority over ordinary shares	Lower risk than ordinary shares in some respects, but not equivalent to secured debt
Limited voting rights	Less control than ordinary shareholders
Cumulative preference	Missed dividends may accrue, depending on terms
Redeemable preference	May be repaid on defined terms

Equity ratios and interpretation

Ratio	Plain formula	What it tells you	Trap
Earnings per share	Profit attributable to ordinary shareholders / weighted average ordinary shares	Profit per ordinary share	Can rise after buybacks even if total profit is flat
P/E ratio	Share price / EPS	Market valuation relative to earnings	High P/E can mean growth expectations or overvaluation
Dividend yield	Dividend per share / share price	Income return based on current price	A high yield may signal dividend risk
Dividend cover	EPS / dividend per share	Ability of earnings to cover dividend	Accounting profit is not cash flow
Net asset value per share	Net assets / shares in issue	Asset backing per share	Less useful for asset-light growth businesses
Gearing	Debt relative to equity or capital	Financial leverage and risk	Definitions vary; read the question carefully
Return on equity	Profit after tax / equity	Profitability relative to shareholder capital	High ROE can be boosted by leverage

Key equity formulas

\[ \text{Dividend yield} = \frac{\text{Dividend per share}}{\text{Current share price}} \times 100 \]\[ \text{P/E ratio} = \frac{\text{Share price}}{\text{Earnings per share}} \]\[ \text{Dividend cover} = \frac{\text{Earnings per share}}{\text{Dividend per share}} \]

Corporate actions

Corporate action	What happens	What candidates often miss
Rights issue	Existing shareholders can buy new shares in proportion to holdings	Rights have value; not taking up rights can dilute ownership
Bonus issue	Free shares issued from reserves	Total company value does not automatically increase
Share split	More shares at lower price per share	Economic ownership is unchanged
Consolidation	Fewer shares at higher price per share	Economic ownership is unchanged
Buyback	Company buys its own shares	May improve EPS but uses cash
Scrip dividend	Dividend paid in shares rather than cash	Income need may not be met
Special dividend	One-off dividend	Should not be treated as recurring income

Rights issue review

A rights issue question often tests dilution, theoretical ex-rights price, or whether the shareholder should subscribe, sell rights, or do nothing.

\[ \text{TERP} = \frac{ (\text{old shares} \times \text{cum-rights price}) + (\text{new shares} \times \text{subscription price}) }{ \text{total shares after issue} } \]

Decision points:

Compare the subscription price with the market price.
Calculate the value of the right if required.
Identify whether the investor has cash to subscribe.
Recognise that selling rights may preserve economic value better than ignoring them.
Do not assume a discounted issue is automatically a bargain; consider the reason capital is being raised.

Corporate actions

Dividend timetable concepts

Term	Meaning	Exam point
Declaration date	Dividend announced	Creates expectation, not always immediate cash
Ex-dividend date	Buyer no longer receives declared dividend	Price usually adjusts down approximately by dividend
Record date	Register checked for entitlement	Do not confuse with ex-date
Payment date	Cash paid	Income timing for client cash flow
Cum-dividend	Buyer receives upcoming dividend	Price includes dividend entitlement
Ex-dividend	Seller retains upcoming dividend	Buyer should not expect that dividend

Notes and examples

Rights issue

A rights issue offers existing shareholders new shares, usually at a discount, in proportion to current holdings.

\[ \text{TERP}=\frac{(\text{Old shares}\times\text{Old price})+(\text{New shares}\times\text{Subscription price})}{\text{Old shares}+\text{New shares}} \]\[ \text{Value per existing share of the right}=\text{Cum-rights price}-\text{TERP} \]\[ \text{Value per new share entitlement}=\text{TERP}-\text{Subscription price} \]

Example: 2-for-5 rights at 180p when the share price is 300p.

\[ \text{TERP}=\frac{(5\times300)+(2\times180)}{7}=265.71\text{p} \]

Action for shareholder	Effect
Take up rights	Maintains proportionate ownership; requires cash
Sell rights nil-paid	Realises value without investing more
Let rights lapse	Usually poor unless automatic sale/lapse proceeds apply
Do nothing in exam scenarios	Check whether question says rights lapse, are sold, or are taken up

Other corporate actions

Corporate action	What happens	Shareholder economics
Bonus/scrip/capitalisation issue	Free additional shares from reserves	More shares, lower theoretical price, no new cash
Share split	More shares with lower nominal/market price	Total value theoretically unchanged
Consolidation	Fewer shares with higher price per share	Total value theoretically unchanged
Open offer	Existing holders may buy shares; rights often not tradable	Less flexible than tradable rights
Placing	Shares placed with selected investors	May dilute existing holders
Share buyback	Company buys own shares	Can support EPS; may return surplus cash
Takeover cash offer	Shareholder receives cash if accepted/completed	Consider price certainty and tax consequences
Takeover share offer	Shareholder receives bidder shares	Continued market exposure
Tender offer	Company or bidder offers to buy shares at stated terms	Acceptance may be scaled back

Debt securities reference

Bond anatomy

Term	Meaning
Nominal/par value	Amount on which coupon is calculated and often redemption amount
Coupon	Stated interest rate paid on nominal value
Clean price	Quoted bond price excluding accrued interest
Dirty price	Actual settlement price including accrued interest
Maturity/redemption date	Date principal is repaid, unless perpetual or called earlier
Yield	Return implied by price, coupon, and redemption
Credit spread	Extra yield over lower-risk benchmark for credit/liquidity risk
Duration	Approximate sensitivity to yield changes

Notes and examples

\[ \text{Dirty price}=\text{Clean price}+\text{Accrued interest} \]\[ \text{Accrued interest}=\text{Coupon payment}\times\frac{\text{Days accrued}}{\text{Days in coupon period}} \]\[ \text{Running yield}=\frac{\text{Annual coupon}}{\text{Clean price}}\times100 \]

Approximate gross redemption yield:

\[ \text{Approx. GRY}=\frac{\text{Annual coupon}+\frac{\text{Redemption price}-\text{Purchase price}}{\text{Years to redemption}}}{\frac{\text{Redemption price}+\text{Purchase price}}{2}}\times100 \]

Approximate price sensitivity:

\[ \%\Delta\text{Price}\approx-\text{Modified duration}\times\Delta\text{Yield} \]

Bond price and yield relationships

If this happens	Bond price effect	Yield effect	Why
Market interest rates rise	Falls	Rises	Existing fixed coupons less attractive
Market interest rates fall	Rises	Falls	Existing fixed coupons more attractive
Credit rating downgraded	Falls	Rises	Investors demand wider spread
Inflation expectations rise	Usually falls for conventional bonds	Rises	Fixed coupons lose real value
Time passes toward maturity	Pulls toward redemption value	Yield converges	Pull-to-par effect
Coupon is higher	Lower duration, all else equal	More cash returned earlier	Less sensitivity
Maturity is longer	Higher duration, all else equal	More uncertainty	More sensitivity

Bond types and exam distinctions

Bond type	Key feature	Main client risk
Conventional fixed-rate bond	Fixed coupon and redemption	Interest-rate and inflation risk
Floating-rate note	Coupon resets to reference rate plus/minus margin	Credit risk; coupon uncertainty
Zero-coupon bond	Issued at discount; no periodic coupon	High duration and reinvestment/tax timing
Index-linked bond	Coupons/principal linked to inflation index	Real-rate risk; indexation details
Callable bond	Issuer can redeem early	Reinvestment risk when rates fall
Puttable bond	Investor can require redemption	Lower yield for added investor protection
Convertible bond	Can convert into ordinary shares	Equity downside plus credit risk
Perpetual bond	No fixed maturity	High duration and liquidity risk
Subordinated bond	Lower ranking in default	Higher loss severity
Secured bond	Backed by specified assets/security	Security valuation/enforcement risk

Yield curve shapes

Shape	Usual interpretation	Portfolio implication
Upward sloping	Longer maturities yield more	Normal term premium; longer bonds more rate-sensitive
Flat	Little yield reward for maturity extension	Avoid taking duration without compensation
Inverted	Short yields above long yields	Market may expect rate cuts or economic slowdown
Steepening	Long yields rising vs short or short falling vs long	Duration positioning matters
Flattening	Long-short yield gap narrows	Reinvestment and maturity choices matter

Convertibles, warrants, and option-like securities

Convertible bond calculations

\[ \text{Conversion parity}=\text{Share price}\times\text{Conversion ratio} \]\[ \text{Conversion premium}=\text{Convertible price}-\text{Conversion parity} \]\[ \text{Conversion premium \%}=\frac{\text{Convertible price}-\text{Conversion parity}}{\text{Conversion parity}}\times100 \]

Concept	Meaning	Trap
Conversion ratio	Number of shares received per bond	Use ratio stated in question, not nominal value assumptions
Parity	Equity value if converted now	Does not include bond income value
Premium	Extra paid for bond floor and option value	High premium needs strong share performance
Bond floor	Value as a straight bond	Falls if credit quality worsens
Dilution	More shares if converted	Existing ordinary holders may be diluted

Notes and examples

Warrants versus options

Feature	Warrant	Exchange-traded option
Issuer	Usually company or financial institution	Exchange/clearing structure
New shares on exercise	Company warrants may create new shares	Usually transfer/exposure, not new company issue
Life	Often longer dated	Standardised expiries
Liquidity	May be limited	Depends on contract market
Main risk	Leverage, expiry, issuer terms	Leverage, expiry, margin/market risk

Pooled investments and listed funds

Vehicle	Open/closed	Pricing	Gearing	Key risks	Good exam distinction
OEIC	Open-ended	Usually single price based on NAV	Usually limited by fund rules	Market, liquidity, dilution adjustments	Creates/cancels shares to meet flows
Unit trust	Open-ended	May be dual priced or single priced	Usually limited by scheme rules	Market, liquidity, spread	Units rather than shares
Investment trust	Closed-ended company	Exchange price, may differ from NAV	Can borrow/gearing	Market, discount volatility, gearing	Share price can trade at discount/premium
ETF	Usually open-ended fund traded on exchange	Intraday market price near NAV	Some are leveraged	Tracking, liquidity, counterparty	Creation/redemption helps arbitrage
ETC	Exchange-traded commodity exposure	Exchange traded	May be secured or synthetic	Commodity, currency, counterparty	Often not a company share
ETN	Debt note linked to index/asset	Exchange traded	Issuer obligation	Issuer credit risk	Investor is exposed to issuer default
REIT	Property company/trust structure	Exchange traded	Property gearing possible	Property, liquidity, rate risk	Property exposure through listed security

Notes and examples

Active versus passive fund logic

Feature	Active	Passive/index-tracking
Objective	Outperform benchmark	Replicate benchmark
Cost	Usually higher	Usually lower
Risk	Manager selection and style risk	Tracking error and index concentration
Performance driver	Manager skill, process, style	Market beta and replication quality
Exam trap	Outperformance not guaranteed	Low cost does not mean low risk

Physical versus synthetic ETF replication

Method	How exposure is obtained	Main risk
Full physical replication	Holds all index constituents	Cost, liquidity, rebalancing
Sampling	Holds representative basket	Tracking error
Synthetic replication	Uses swaps/derivatives	Counterparty and collateral risk
Leveraged/inverse	Targets multiple or opposite daily return	Compounding path dependency; short-term use

Open-ended vs closed-ended structures

Feature	Open-ended funds, such as unit trusts/OEICs	Closed-ended funds, such as investment trusts
Share/unit creation	Units or shares expand/contract with investor flows	Fixed pool of shares after issue, unless corporate action
Price basis	Linked to net asset value	Market price can trade at premium or discount to NAV
Liquidity	Dealt through fund manager/platform, subject to fund terms	Traded on market, subject to market liquidity
Gearing	Often limited by fund rules	Investment trusts may use gearing
Discounts/premiums	Usually not central	Important performance driver
Dealing	Typically priced at valuation point	Intraday trading possible if exchange-traded

Active, passive, and ETF review

Type	Core idea	Key exam risk
Active fund	Manager seeks to outperform benchmark	Higher charges and manager risk
Passive index fund	Seeks to track an index	Tracking error and index concentration
ETF	Exchange-traded fund, often index-tracking	Market price may deviate from NAV, liquidity varies
Smart beta	Rules-based exposure to factors	Not the same as guaranteed outperformance
Fund of funds	Invests in other funds	Extra layer of charges and possible overlap
Multi-asset fund	Blends asset classes	Asset allocation still needs to match client

Fund charges and returns

Candidates often focus on gross performance and miss cost drag.

Review these concepts:

Ongoing charges reduce investor return.
Initial charges, bid-offer spreads, dealing commissions, platform fees, and taxes can affect net outcome.
A low-cost tracker may outperform a higher-cost active fund if the active manager does not add value.
A fund with strong past performance may still be unsuitable if its risk profile is wrong.
Fund liquidity depends partly on underlying assets, not just the fund label.

Investment trust traps

A trust can perform well at NAV level while shareholders underperform if the discount widens.
Gearing can magnify gains and losses.
A discount is not automatically a buying opportunity.
A premium is not automatically a sign of quality.
Market price return and NAV return are different.

Trading, market structure, and settlement

Order types

Order	What it does	Gives certainty of	Does not guarantee
Market order	Execute promptly at available price	Execution, if market available	Price
Limit order	Buy no higher or sell no lower than limit	Price limit	Execution
Stop-loss order	Becomes active when trigger reached	Trigger discipline	Final execution price
Stop-limit order	Trigger creates limit order	Price limit after trigger	Execution
Fill-or-kill	Execute immediately in full or cancel	No partial fill	Execution
Immediate-or-cancel	Execute immediately all/part, cancel balance	Fast execution attempt	Full quantity
Good-till-cancelled/date	Remains live until cancelled/date	Persistence	Favourable execution

Notes and examples

Bid-offer spread

\[ \text{Spread}=\text{Offer price}-\text{Bid price} \]\[ \text{Spread \%}=\frac{\text{Offer}-\text{Bid}}{\text{Mid price}}\times100 \]

Term	Meaning
Bid	Price at which market maker/buyer buys from investor
Offer/ask	Price at which investor buys
Mid price	Approximate midpoint between bid and offer
Spread cost	Immediate round-trip cost before commission/taxes
Wider spread	Usually lower liquidity, higher volatility, or higher dealing cost

Market participants and venues

Term	Role
Issuer	Company/government raising capital
Investor	Buys securities for return/risk exposure
Broker	Executes orders for clients
Market maker	Quotes buy and sell prices, providing liquidity
Exchange/order book	Central venue for matching orders
Clearing system	Calculates obligations between parties
Settlement system	Transfers cash and securities
Custodian/nominee	Holds assets on behalf of beneficial owner
Registrar	Maintains shareholder register for issuer

Primary versus secondary market

Market	Function	Example
Primary	New capital raised by issuer	IPO, bond issue, rights issue
Secondary	Existing securities traded between investors	Exchange share trade
Public offer	Offered broadly to investors	Prospectus/admission process may apply
Placing	Securities placed with selected investors	Faster, may dilute existing holders
Underwriting	Underwriter commits to take unsold issue	Reduces issuer funding uncertainty
Bookbuilding	Demand and price discovered from investors	Common for institutional issuance

Settlement logic

Concept	Exam point
Trade date	Date transaction is agreed
Settlement date	Date cash and securities are exchanged
Rolling settlement	Settlement occurs a set number of business days after trade date
Delivery versus payment	Securities delivered only against payment
Failed settlement	One party does not deliver cash/securities on time
Corporate action entitlement	Depends on record/ex-dividend dates and settlement rules
Accrued interest	Bond buyer usually compensates seller for interest earned since last coupon

Use the settlement cycle, calendar, and day-count convention stated in the question or current study text. If an exam item provides dates, apply those dates rather than relying on memory.

Listing, markets, and issuer status

Concept	Core distinction
Listed company	Securities admitted to an official/listed market under relevant listing rules
Quoted/traded company	Securities traded on a market; may not have the same listing status
Main market style admission	Generally more established issuers and fuller eligibility/disclosure expectations
Growth market style admission	Often smaller/growth issuers; different admission and adviser model
Free float	Shares available for public trading
Market capitalisation	Share price multiplied by shares in issue
Liquidity	Ability to trade without materially moving price
Corporate governance	Board, controls, shareholder rights, disclosure standards

Tax and wrapper logic for securities questions

Tax rules, allowances, and rates change. In exam calculations, use the rates and assumptions supplied in the question or study material.

Instrument/event	Usual tax issue to identify	Exam trap
Share dividend	Income tax treatment of dividends	Do not treat as bond interest
Bond coupon	Interest income treatment	Coupon rate is not tax rate
Capital disposal	Capital gain or loss calculation	Deduct allowable cost and transaction costs if instructed
Accrued interest on bonds	Buyer/seller allocation may matter	Clean price is not total settlement cost
Funds with income units	Income distributed	Not the same as capital gain
Accumulation units	Income reinvested within fund	Income may still be taxable depending on rules
Offshore funds	Reporting/non-reporting distinction may matter	Do not assume same treatment as UK fund
ISAs/pensions/wrappers	Tax shelter may alter income/gains taxation	Product suitability still matters
Stamp/transaction taxes	Purchase taxes may apply to some securities	Apply only if question states or syllabus convention requires
Gilts/QCBs	Special capital gains treatment may be relevant	Do not generalise to all bonds

Client suitability decision matrix

Client need	More suitable features	Less suitable features
Capital preservation	High-quality short-dated bonds, cash-like assets, diversification	Concentrated equities, leverage, long duration
Income	Dividend shares, bond funds, investment-grade bonds	Non-income growth stocks, high volatility products
Inflation protection	Real assets, index-linked bonds, equities with pricing power	Long fixed-rate nominal bonds
Long-term growth	Diversified equities, funds, reinvested income	Excess cash, short-term low-return assets
Liquidity	Large-cap securities, daily-dealt funds, short maturities	Unquoted shares, thinly traded bonds, property funds
Low capacity for loss	Diversification, lower volatility, lower credit risk	Subordinated debt, warrants, leveraged ETPs
Ethical/restriction mandate	Screened funds, direct exclusions	Broad index exposure that breaches restrictions
Tax efficiency	Appropriate wrappers and asset location	Tax-driven recommendation that increases unsuitable risk

Notes and examples

Suitability checklist

Before selecting a security, identify:

Investment objective: income, growth, preservation, liability matching.
Time horizon: short, medium, long; known cash needs.
Attitude to risk: willingness to accept volatility/loss.
Capacity for loss: financial ability to withstand loss.
Knowledge and experience: product complexity and client understanding.
Liquidity requirement: access to cash and dealing frequency.
Tax position: wrapper availability, income/gain preference.
Concentration: existing holdings, employer shares, sector bias.
Currency exposure: asset currency versus client spending currency.
Costs: spread, commission, fund charges, transaction taxes.
Complexity: embedded derivatives, leverage, conditional protection.
Documentation: rationale linking recommendation to client facts.

Risk reference

Risk	Definition	Securities most exposed
Market risk	Price falls due to market movement	Equities, funds, ETPs
Specific/company risk	Issuer-specific adverse event	Individual shares, corporate bonds
Credit/default risk	Issuer fails to pay interest/principal	Corporate bonds, ETNs, structured products
Interest-rate risk	Prices move as rates change	Fixed-rate bonds, preference shares
Duration risk	Sensitivity to yield changes	Long-dated/low-coupon bonds
Inflation risk	Real value eroded by inflation	Cash, fixed coupons
Liquidity risk	Cannot trade quickly at fair price	Small caps, thin bonds, alternatives
Currency risk	FX movement changes sterling return	Overseas securities/funds
Reinvestment risk	Cash flows reinvested at lower rates	Coupon bonds, callable bonds
Counterparty risk	Other party fails to perform	Swaps, synthetic ETFs, structured products
Gearing/leverage risk	Losses amplified by borrowing/derivatives	Investment trusts, warrants, leveraged ETPs
Concentration risk	Too much exposure to one issuer/sector	Direct share portfolios
Regulatory/tax risk	Rule changes affect return/suitability	Tax-sensitive products
Operational/settlement risk	Processing or settlement failure	All traded securities

Scenario selection table

Scenario clue	Likely answer direction	Avoid
Retired client needs stable income and low volatility	Diversified income portfolio, high-quality bonds, cautious funds	Single high-yield share or subordinated debt concentration
Young client with long horizon and high risk tolerance	Diversified equity exposure, regular investing	Overemphasis on cash or short bonds
Client fears inflation	Index-linked bonds, real assets, equity exposure	Long-dated fixed nominal bonds only
Client wants capital protection but may need early access	Check protection conditions, term, issuer risk, secondary market	Assuming structured product protection applies before maturity
Client wants to speculate with small capital	Warrants/options may fit only if loss understood	Presenting leverage as investment-grade income
Client holds employer shares	Diversification and concentration reduction	Adding same-sector exposure
Client needs known cash amount on known date	Matching maturity bond/low-risk assets	Long equity fund with uncertain value
Client wants low-cost broad market exposure	Passive fund or ETF	Ignoring tracking error and dealing spread
Client wants property exposure but daily liquidity	Listed REIT/property securities may be more liquid	Open-ended property fund liquidity mismatch
Client cannot tolerate capital loss	Risk assets may be unsuitable	Saying diversification removes loss risk

Calculation checklist

Equity calculations

Task	Steps
Dividend yield	Annualise dividend if needed; divide by current price; multiply by 100
P/E	Use price per share and EPS in same units
EPS	Use ordinary shareholder earnings and weighted average ordinary shares
Dividend cover	EPS divided by DPS
NAV discount/premium	Compare market price with NAV per share
Rights issue TERP	Weight old shares at old price and new shares at subscription price
Total return	Include income plus capital gain/loss, net or gross as instructed

Notes and examples

Bond calculations

Task	Steps
Accrued interest	Identify coupon, coupon period, days accrued, day-count convention
Dirty price	Add accrued interest to clean price
Running yield	Annual coupon divided by market price
Redemption yield	Include coupon plus capital gain/loss to redemption
Duration impact	Multiply modified duration by yield change with negative sign
Real return	Adjust nominal return for inflation if required
Convertible parity	Share price multiplied by conversion ratio

Return formulas

\[ \text{Holding period return}=\frac{\text{Income received}+(\text{Sale price}-\text{Purchase price})}{\text{Purchase price}}\times100 \]\[ \text{Approx. real return}\approx\text{Nominal return}-\text{Inflation rate} \]

More exact real return:

\[ \text{Real return}=\left(\frac{1+\text{Nominal return}}{1+\text{Inflation rate}}-1\right)\times100 \]

Before calculating

Identify whether the question asks for price, yield, return, value, percentage change, or suitability.
Check whether figures are per share, total holding, nominal value, or market value.
Watch whether a price is quoted in pence, pounds, percentage of par, or index points.
Confirm whether income is annual, semi-annual, gross, net, cum-dividend, or ex-dividend.
State the practical interpretation, not just the number.

Frequently tested calculation ideas

Calculation	Steps	Watch for
Dividend yield	Dividend per share divided by current share price	Use current price, not nominal value
P/E ratio	Share price divided by EPS	Match pence with pence or pounds with pounds
Dividend cover	EPS divided by dividend per share	Higher cover usually means more safety, not higher yield
Rights issue TERP	Weighted average of old shares at old price and new shares at subscription price	Use total shares after issue
Running yield	Annual coupon divided by market price	Coupon is based on nominal, not purchase price
Bond capital gain/loss	Redemption value minus purchase price	Include income separately if total return is required
Portfolio return	Weighted average of asset returns	Use market value weights
Real return	Adjust nominal return for inflation	Do not simply subtract for precise calculations unless approximation is acceptable
Currency return	Combine asset return and exchange-rate movement	A rising foreign asset can still lose in base currency

Real return approximation

For quick interpretation, candidates often use an approximation:

\[ \text{Approximate real return} \approx \text{Nominal return} - \text{Inflation rate} \]

For a more exact calculation:

\[ 1 + \text{Real return} = \frac{1 + \text{Nominal return}}{1 + \text{Inflation rate}} \]

Common traps to eliminate

Trap	Correct approach
Coupon equals yield	Coupon is fixed on nominal; yield depends on price and redemption
High yield means low risk	High yield may signal credit risk, dividend risk, or distress
Market order gives price certainty	Market order prioritises execution, not price
Investment trust price equals NAV	It can trade at premium or discount
Diversification removes all risk	It reduces specific risk, not market risk
Capital protection is unconditional	Check issuer risk, term, barriers, and early exit terms
Preference shares are the same as bonds	They are equity securities with different rights and risks
Long-dated gilts are “safe” in price terms	Credit risk may be low, but duration risk can be high
Rights not taken up have no cost	Letting valuable rights lapse can dilute wealth
Ex-dividend buyer gets the dividend	Ex-dividend buyer does not receive the declared dividend
Low-cost ETF means low risk	Market, tracking, liquidity, and counterparty risks remain
Tax answer uses current memory	Use exam-provided rates and assumptions
Nominal return equals real return	Adjust for inflation when asked
Average price is enough for portfolio risk	Consider concentration, correlation, and liquidity
Past dividend implies future dividend	Ordinary dividends can be cut or cancelled

Last-pass revision workflow

    flowchart TD
	    A[Read client or security scenario] --> B{Calculation or suitability?}
	    B -->|Calculation| C[Identify units, dates, price basis, tax assumptions]
	    C --> D[Apply formula and check reasonableness]
	    B -->|Suitability| E[Identify objective, horizon, risk, capacity, tax, liquidity]
	    E --> F[Match product features to client facts]
	    F --> G[Reject products with unsuitable risk or complexity]
	    D --> H[Review common traps]
	    G --> H
	    H --> I[Select answer that fits both facts and technical rule]

High-yield exam map

Area	What to know quickly	Common exam angle
Securities markets	Primary vs secondary markets, order types, liquidity, spreads, trading venues, settlement concepts	Identify who bears which risk and why a quoted price differs from value
Equity securities	Ordinary shares, preference shares, dividends, voting, corporate actions, ratios	Calculate or interpret yield, EPS, P/E, rights issues, dilution
Fixed income	Coupon, maturity, redemption, yield, duration, credit risk, inflation risk, convertibles	Explain price-yield movement and match bond type to client need
Funds and pooled vehicles	Unit trusts/OEICs, ETFs, investment trusts, index funds, active funds	Compare open-ended and closed-ended structures, charges, liquidity, tracking error
Derivatives and structured products	Options, futures, forwards, warrants, leverage, hedging vs speculation	Distinguish payoff, margin, downside risk, and suitability
Portfolio construction	Asset allocation, diversification, correlation, risk profile, capacity for loss	Choose suitable investments for objectives, time horizon, liquidity, and risk
Performance and risk	Total return, volatility, beta, Sharpe ratio, tracking error, benchmarks	Interpret whether extra return was achieved for extra risk
Tax and wrappers	Income vs capital treatment, gross vs net return, tax-efficient wrappers	Avoid giving a “best” answer without considering tax status and account type
Advice suitability	Objectives, knowledge and experience, affordability, charges, disclosure, records	Select the recommendation that is justified by client facts

The core suitability decision path

Use this decision path when a question asks which investment, portfolio action, or product is most appropriate.

    flowchart TD
	    A[Client facts] --> B[Objective: income, growth, preservation, speculation]
	    B --> C[Time horizon and liquidity need]
	    C --> D[Risk tolerance and capacity for loss]
	    D --> E[Knowledge, experience, and complexity]
	    E --> F[Tax position and wrappers]
	    F --> G[Costs, charges, and dealing implications]
	    G --> H[Match asset class]
	    H --> I[Select instrument or fund structure]
	    I --> J[Explain key risks and rationale]

Notes and examples

Fast decision rules

If the client mainly needs…	Usually look first at…	Be careful with…
Capital preservation	Cash-like assets, high-quality short-dated fixed income	Inflation risk, reinvestment risk, concentration
Regular income	Bonds, equity income funds, dividend-paying shares	Credit risk, dividend cuts, duration, tax treatment
Long-term growth	Equities, diversified funds, global exposure	Volatility, currency exposure, overconcentration
Inflation protection	Equities, real assets, inflation-linked bonds	Valuation risk and product-specific structure
Diversification	Multi-asset funds, broad trackers, uncorrelated assets	False diversification through overlapping holdings
Short-term speculation	Derivatives or volatile securities may appear	Suitability, leverage, margin, maximum loss

If the question asks for the “most suitable” investment

Use this order:

Eliminate anything clearly inconsistent with risk tolerance or capacity for loss.
Eliminate anything inconsistent with time horizon or liquidity need.
Eliminate products the client is unlikely to understand.
Compare tax, charges, and diversification.
Select the answer with the strongest client-specific rationale.

If the question compares two yields

Ask:

Is one gross and one net?
Are they based on the same price?
Is income fixed or variable?
Does higher yield reflect higher risk?
Is capital at risk?
Is the yield historic, current, running, or redemption-based?

If the question includes a rights issue

How many new shares can be bought?
What is the subscription price?
What is the theoretical ex-rights price?
What is the value of the right?
Does the investor subscribe, sell rights, or allow dilution?
Is the company raising capital for growth, repair, or balance-sheet stress?

If the question includes bonds

Fixed, floating, inflation-linked, convertible, callable, or subordinated?
Short or long duration?
Government or corporate issuer?
Investment-grade or higher-risk credit?
Trading above or below par?
Is the client seeking income, capital certainty, inflation protection, or total return?

If the question includes derivatives

Is the position long or short?
Is the client buying or writing the option?
Is the aim hedging, income generation, or speculation?
What is the maximum loss?
Is leverage involved?
Is margin required?
Does the client understand the payoff?

Securities markets: quick concepts

Primary vs secondary markets

Concept	Meaning	Candidate trap
Primary market	New securities are issued to raise capital	The issuer receives proceeds
Secondary market	Existing securities are traded between investors	The company usually does not receive the sale proceeds
IPO	First public issue of shares	Offer price may not equal first trading price
Rights issue	Existing shareholders are offered new shares, usually at a discount	Ignoring dilution and the value of rights
Placing	Securities placed with selected investors	May dilute existing shareholders
Buyback	Company repurchases its own shares	Can increase EPS, but is not automatically value-enhancing

Notes and examples

Trading, pricing, and liquidity

Term	Review point
Bid price	Price at which a dealer is willing to buy from the investor
Offer price	Price at which a dealer is willing to sell to the investor
Spread	Difference between bid and offer; wider spreads usually mean higher trading cost or lower liquidity
Market order	Prioritises execution, not price certainty
Limit order	Prioritises price limit, not execution certainty
Liquidity	Ability to trade quickly with limited price impact
Volatility	Extent of price fluctuation; not the same as liquidity
Settlement	Completion of trade through delivery of securities and cash
Custody	Safekeeping and administration of assets

Common market-structure traps

Bid vs offer: investors sell at the bid and buy at the offer.
Price vs value: a security’s quoted market price may differ from intrinsic value.
Liquidity vs solvency: a liquid market does not mean the issuer is financially strong.
Execution certainty vs price certainty: market orders and limit orders solve different problems.
Diversification vs liquidity: a diversified portfolio can still contain assets that are difficult to sell quickly.

Fixed income securities

Bond anatomy

Term	Meaning
Nominal/par value	Amount on which coupon is calculated and usually the redemption amount
Coupon	Stated interest payment, often fixed as a percentage of nominal value
Clean price	Quoted price excluding accrued interest
Dirty price	Price including accrued interest
Maturity date	Date on which the bond is due to be redeemed
Redemption yield	Overall yield allowing for coupon, price, redemption value, and time
Running yield	Annual coupon divided by current market price
Duration	Sensitivity of bond price to interest-rate changes
Credit spread	Extra yield over lower-risk benchmark to compensate for credit risk

Notes and examples

Price-yield relationship

The core rule is simple:

When market yields rise, fixed-rate bond prices fall.
When market yields fall, fixed-rate bond prices rise.
Longer-dated and lower-coupon bonds are generally more sensitive to yield changes.
Higher duration means higher price sensitivity.
A bond trading above par has a coupon higher than the market yield for similar risk and maturity.
A bond trading below par has a coupon lower than the market yield for similar risk and maturity.

Fixed income risks

Risk	Meaning	Most relevant when…
Interest-rate risk	Price falls when yields rise	Longer-duration fixed-rate bonds
Credit/default risk	Issuer may fail to pay interest or principal	Lower-rated corporate debt
Inflation risk	Real purchasing power of coupons and redemption is eroded	Fixed nominal coupons over long periods
Reinvestment risk	Coupons must be reinvested at lower rates	Falling-rate environments
Liquidity risk	Bond cannot be sold easily at fair value	Smaller issues or stressed markets
Currency risk	Foreign currency bond returns fluctuate with exchange rates	Investor’s base currency differs from bond currency
Call risk	Issuer redeems early when favourable to issuer	Callable bonds, especially after rates fall
Subordination risk	Investor ranks behind senior creditors	Subordinated or hybrid debt

Bond yield shortcuts

Measure	Use	Limitation
Coupon rate	Cash interest as percentage of nominal	Ignores purchase price
Running yield	Income return using current price	Ignores capital gain/loss to redemption
Redemption yield	Approximate total annual return if held to redemption	Assumes cash flows and reinvestment assumptions
Real yield	Yield after inflation	Depends on inflation measure and assumptions
Yield spread	Compensation over benchmark yield	Spread can widen due to credit or liquidity concerns

\[ \text{Running yield} = \frac{\text{Annual coupon}}{\text{Market price}} \times 100 \]

Duration and price sensitivity

A useful approximation:

\[ \text{Approximate price change \%} \approx -\text{Modified duration} \times \text{Yield change \%} \]

Example interpretation: if modified duration is 6 and yields rise by 1 percentage point, the bond price is expected to fall by approximately 6%, before considering convexity and other factors.

Bond suitability clues

Client need	Bond feature that may fit	Caution
Predictable income	Fixed coupon	Inflation can erode real income
Lower volatility	Short-dated high-quality bonds	Reinvestment risk may increase
Inflation sensitivity	Inflation-linked bonds	Real yields can still move
Higher income	Corporate or lower-rated bonds	Credit and liquidity risk
Equity upside with income	Convertible bonds	More complex; equity sensitivity varies
Capital certainty at date	Individual bond held to maturity	Default risk and reinvestment of coupons remain

Derivatives and structured products

Options

Position	Right or obligation	Market view	Maximum loss concept
Buy call	Right to buy	Bullish	Premium paid
Sell call	Obligation to sell if exercised	Neutral to bearish	Potentially high or unlimited if uncovered
Buy put	Right to sell	Bearish or protective	Premium paid
Sell put	Obligation to buy if exercised	Neutral to bullish	Potentially substantial if underlying falls

Notes and examples

Key option terms:

Strike price: price at which the option may be exercised.
Premium: price paid by option buyer.
Intrinsic value: value if exercised immediately.
Time value: premium above intrinsic value.
In the money: exercise would have value.
Out of the money: exercise would not have immediate value.
Covered call: call written against an existing holding of the underlying asset.
Protective put: put bought to protect a holding against downside risk.

Futures and forwards

Feature	Futures	Forwards
Trading	Exchange-traded	OTC agreement
Standardisation	Standardised contract terms	Customised
Counterparty risk	Reduced by clearing arrangements	Depends on counterparty
Margining	Mark-to-market and margin requirements	Depends on contract terms
Main uses	Hedging, exposure, speculation	Tailored hedging

Derivatives: hedging vs speculation

Use	Example	Exam clue
Hedge downside	Buy put against equity portfolio	Risk reduction, cost is premium
Generate income	Covered call writing	Caps upside, still exposed to downside
Gain leveraged exposure	Buy call or futures position	Small move can cause large gain/loss
Protect currency exposure	Forward foreign exchange contract	Reduces exchange-rate uncertainty
Speculate on fall	Buy put or short future	Loss profile must be understood

Structured products

Structured products combine securities, derivatives, and payoff rules. They may offer defined returns if conditions are met, but they are not automatically low risk.

Review:

Capital protection depends on issuer strength and product terms.
Return may be capped.
Early redemption features can alter outcome.
Complex payoff conditions can be misunderstood.
Liquidity before maturity may be limited.
Counterparty risk is central.

Portfolio construction and asset allocation

Strategic vs tactical asset allocation

Term	Meaning	Common trap
Strategic asset allocation	Long-term asset mix based on objectives and risk profile	Treating short-term market view as more important than client profile
Tactical asset allocation	Short-term deviation from strategic mix	Overtrading or timing risk
Rebalancing	Restoring asset mix after market movement	Selling winners and buying laggards can feel uncomfortable but controls risk
Diversification	Combining assets with imperfect correlation	Does not eliminate systematic market risk

Notes and examples

Risk profile components

Do not rely on “attitude to risk” alone.

Component	Question to ask
Risk tolerance	How much volatility is the client emotionally willing to accept?
Capacity for loss	How much loss can the client financially withstand?
Time horizon	How long before the money is needed?
Liquidity need	How quickly must assets be accessible?
Knowledge and experience	Can the client understand the investment and risks?
Concentration	Is too much wealth tied to one asset, sector, employer, or currency?
Tax position	Does tax change the suitable investment or account wrapper?

Correlation and diversification

Correlation	Meaning	Portfolio impact
+1	Assets move together perfectly	Little diversification benefit
0	No consistent relationship	Some diversification benefit
-1	Assets move perfectly opposite	Strong diversification benefit in theory

Important distinction:

Diversification can reduce unsystematic risk.
Diversification cannot remove broad market risk.
A portfolio of many shares in one sector may still be poorly diversified.
Global diversification introduces currency and geopolitical risk.

Performance and risk measurement

Return measures

Measure	Use	Trap
Capital return	Price change only	Ignores income
Income return	Dividends or interest	Ignores price movement
Total return	Income plus capital movement	Best broad measure before costs and tax
Nominal return	Return before inflation adjustment	May overstate improvement in purchasing power
Real return	Return after inflation	Can be negative even when nominal return is positive
Money-weighted return	Affected by cash-flow timing	Useful for investor experience
Time-weighted return	Removes effect of cash-flow timing	Useful for manager comparison

Notes and examples

Risk and performance ratios

\[ \text{Sharpe ratio} = \frac{\text{Portfolio return} - \text{Risk-free return}} {\text{Standard deviation of portfolio returns}} \]

Higher Sharpe ratio generally indicates more return per unit of total volatility, but it is still backward-looking.

\[ E(R_i) = R_f + \beta_i(E(R_m) - R_f) \]

The capital asset pricing model links expected return to systematic risk, measured by beta.

Metric	What it measures	Candidate trap
Standard deviation	Volatility of returns	Treating volatility as the only risk
Beta	Sensitivity to market movements	Beta does not capture all risks
Alpha	Return above benchmark after risk adjustment	Depends on benchmark choice
Tracking error	Variability of return relative to benchmark	Low tracking error does not mean low absolute risk
Information ratio	Active return per unit of active risk	Useful for comparing active managers
Maximum drawdown	Peak-to-trough fall	Important for client behaviour and capacity for loss
Sharpe ratio	Excess return per unit of volatility	Can be distorted by non-normal returns

Tax and account-wrapper awareness

The CISI IAD Securities Technical Unit can test whether tax affects the most suitable investment answer. Avoid memorising only product features; consider the client’s tax position and wrapper availability.

Tax-sensitive review points

Issue	Why it matters
Income vs capital growth	Clients may be taxed differently on income and gains
Gross vs net yield	A high gross yield may be less attractive after tax
Tax-efficient wrappers	Can change the preferred investment location
Dividend income	May be treated differently from interest income
Bond interest	Often relevant for income-tax planning
Capital gains	Disposal timing and realised gains can matter
Accumulation vs income units	Distribution treatment and cash-flow needs differ
Offshore or foreign securities	Currency and tax reporting complexity may increase

Notes and examples

Common tax traps

Selecting the highest-yielding investment without considering tax.
Ignoring whether the client needs cash income or can accept accumulation.
Confusing tax efficiency with investment suitability.
Assuming a wrapper removes investment risk.
Comparing pre-tax return on one option with post-tax return on another.

Product suitability comparison

Product or asset	Potential strengths	Key risks	More suitable when…	Less suitable when…
Cash deposits	Liquidity, capital stability	Inflation risk, low return	Short-term reserve needed	Long-term growth objective
Ordinary shares	Growth and dividend potential	High volatility, business risk	Long time horizon and risk capacity	Low capacity for loss
Preference shares	Income priority over ordinary shares	Limited upside, issuer risk	Income need with equity-like risk acceptance	Capital security is essential
Government bonds	Income, lower credit risk than many corporates	Interest-rate and inflation risk	Defensive allocation needed	Rates may rise sharply and duration is long
Corporate bonds	Higher yield than comparable government debt	Credit and liquidity risk	Client accepts issuer risk for income	Client needs very low risk
High-yield bonds	Higher income potential	Default risk, equity-like behaviour in stress	Higher-risk income allocation	Capital preservation priority
Index tracker	Low cost, broad market exposure	Market risk, index concentration	Efficient broad exposure wanted	Need downside protection
Active fund	Manager skill may add value	Charges, style drift, underperformance	Specialist exposure or active view justified	Low-cost market exposure sufficient
ETF	Intraday trading, transparency, low cost in many cases	Liquidity, tracking error, complexity in some structures	Tactical or broad exposure needed	Client may misunderstand trading risk
Investment trust	Permanent capital, potential gearing, specialist sectors	Discount/premium movement, gearing risk	Long-term investor accepts market pricing	Short-term capital certainty needed
Options	Defined strategies, hedging potential	Complexity, expiry, leverage	Client understands payoff and risk	Basic investment need only
Structured product	Defined payoff profile	Counterparty, liquidity, complexity	Specific risk-return outcome understood	Client needs simplicity and transparency

Common candidate mistakes

Conceptual mistakes

Treating all bonds as “safe” without considering duration, credit quality, currency, and liquidity.
Confusing coupon with yield.
Assuming a high dividend yield is always attractive.
Forgetting that investment trusts can trade at discounts or premiums to NAV.
Treating ETFs as risk-free because they are diversified or passive.
Assuming diversification removes all risk.
Recommending complex products to clients with limited knowledge and experience.
Ignoring charges when comparing active and passive options.
Using past performance as the main suitability reason.
Choosing an investment based only on return, not risk-adjusted return.

Notes and examples

Calculation mistakes

Mixing pence and pounds.
Using nominal value instead of market price for equity yield.
Using market price instead of nominal value for bond coupon.
Forgetting accrued interest when asked for dirty price.
Ignoring dilution in rights issues.
Calculating percentage change from the wrong base.
Comparing annual and multi-period returns without annualising.
Forgetting that negative returns compound differently from positive returns.

Suitability mistakes

Matching “high return” to “growth objective” without checking risk capacity.
Selecting illiquid investments for a short-term need.
Recommending leveraged products for a cautious client.
Ignoring currency exposure for overseas assets.
Failing to consider concentration in employer shares, property, sector, or country.
Selecting tax-efficient products without confirming investment suitability.
Overlooking whether income is required now or growth is preferred.

Mini review tables by topic

Equity vs debt

Feature	Equity	Debt
Investor role	Owner	Lender
Return	Dividends and capital growth	Interest and redemption
Income certainty	Variable, not guaranteed	Contractual but subject to default risk
Ranking on insolvency	Behind creditors	Ahead of shareholders, subject to seniority
Voting rights	Usually yes for ordinary shares	Usually no
Upside	Potentially unlimited	Usually limited to coupon and redemption
Key risk	Business and market risk	Interest-rate, credit, inflation risk

Notes and examples

Passive vs active

Issue	Passive	Active
Objective	Track index	Beat benchmark
Cost	Often lower	Often higher
Risk	Market and tracking risk	Market, manager, style, and tracking risk
Outperformance potential	Limited before fees	Possible but uncertain
Best exam phrase	Efficient broad exposure	Skill-based selection

Growth vs income investing

Feature	Growth approach	Income approach
Main aim	Capital appreciation	Cash flow
Typical assets	Growth equities, growth funds	Bonds, dividend shares, income funds
Reinvestment	Often expected	May be less important
Key risk	Valuation compression, volatility	Income cuts, inflation, credit risk
Client fit	Longer horizon, higher risk capacity	Regular withdrawals or income need

Domestic vs international exposure

Benefit	Risk
Broader diversification	Currency volatility
Access to growth sectors and regions	Political and regulatory risk
Reduced dependence on domestic economy	Tax and reporting complexity
Potential return enhancement	Higher costs or liquidity differences

Final quick scan before practice

Before starting mock exams, make sure you can explain these without notes:

Why bond prices fall when yields rise.
Difference between coupon, running yield, and redemption yield.
How ordinary shares differ from preference shares and bonds.
Why a rights issue can dilute ownership.
Difference between open-ended funds and investment trusts.
Why an investment trust discount matters.
How options buyers and writers differ.
Why leverage magnifies both gains and losses.
Why diversification reduces unsystematic risk but not market risk.
How risk tolerance differs from capacity for loss.
Why gross return is not the same as net client outcome.
How to select the most suitable investment from client facts.

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