Free CISI IAD Securities Practice Questions: Equities and Issuance

CISI means Chartered Institute for Securities & Investment. IAD means Investment Advice Diploma, and this page is for the Securities unit. Use this focused CISI IAD Securities page as a short practice test for Equities and Issuance. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CISI questions, copied live-exam content, or exam dumps.

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Sample questions

These are original Finance Prep practice questions aligned to this topic area. They are not official CISI questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

An adviser is comparing four ordinary shares in the same sector. Assume the companies have comparable risk and expected growth, and that a lower price/earnings ratio gives the stronger value signal. The P/E ratio is calculated as share price divided by earnings per share.

Based only on the table, which company shows the strongest value signal?

• A. Drayton plc
• B. Candover plc
• C. Alder plc
• D. Bexley plc

Best answer: A

What this tests: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

Explanation: The price/earnings ratio compares the market price of a share with the company’s earnings per share. Here, all companies are assumed to have comparable risk and growth prospects, so the lowest P/E ratio gives the strongest value signal. The ratios are: Alder, 240p / 20p = 12; Bexley, 360p / 24p = 15; Candover, 510p / 30p = 17; and Drayton, 280p / 28p = 10. Drayton is therefore the cheapest on this measure. In practice, a low P/E may reflect risk, weak growth, or market pessimism, but those factors have been held constant in the comparison.

• Alder plc has a P/E of 12, which is lower than two companies but not the lowest.
• Bexley plc has a P/E of 15, making it less attractive on this value measure than Alder and Drayton.
• Candover plc has the highest P/E at 17, so it gives the weakest value signal on the stated basis.
• Drayton plc has the lowest P/E at 10, so it gives the strongest value signal under the stated assumptions.

Drayton plc has the lowest P/E ratio, calculated as 280p divided by 28p, giving 10 times earnings.

Question 2

Topic: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

An investment firm’s corporate finance team is advising Bidder plc on a confidential takeover approach for Moorland plc. The offer has not been announced and, if made public, is expected to have a material effect on Moorland’s share price. Moorland has been put on the firm’s restricted list. A private client adviser, who has not been crossed over the information barrier, receives an unsolicited client instruction to buy Moorland shares. What is the single best response?

• A. Treat the issue as front running only if the adviser intends to buy Moorland shares personally before executing the client order.
• B. Execute the trade normally because the client instruction was unsolicited and the adviser has not received the takeover details.
• C. Disclose the corporate finance conflict to the client and proceed if the client confirms the instruction.
• D. Follow the restricted-list procedure and not execute the trade unless compliance clearance permits it.

Best answer: D

What this tests: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

Explanation: Confidential takeover information that is not public and is likely to affect the target’s share price is inside information. A firm may use information barriers to stop that information passing from corporate finance to sales, research or advisory staff, but a restricted list can still prevent or require clearance for trading in the relevant security. The adviser should therefore follow the firm’s trading restriction process rather than execute simply because the client initiated the order. Front running would involve dealing ahead of a known client order for advantage; it is not the main issue here. A conflict disclosure also does not override market abuse controls or restricted-list requirements.

• Executing normally ignores the firm-wide restricted-list control.
• Front running is a different abuse involving misuse of advance knowledge of a client order.
• Client consent or disclosure cannot make trading permissible where inside information controls restrict dealing.

The firm holds price-sensitive non-public takeover information, so trading restrictions apply despite the adviser not being crossed over the information barrier.

Question 3

Topic: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

At a UK securities firm, the corporate finance team is advising BidCo on a possible cash takeover of Target plc. Before any public announcement, the following internal facts are recorded:

• Proposed offer price: 620p per Target share
• Target previous closing price: 500p
• Target added to the restricted list at 09:05
• Only the corporate finance team has been wall-crossed
• A sales trader outside corporate finance wants to buy Target shares for a personal account at 09:20
• No client order in Target shares has been received

At 11:05, after the offer is announced, Target trades at 612p. Which compliance conclusion is most appropriate?

• A. Conclude that the bid was not price-sensitive because the 11:05 market price was below the offer price.
• B. Allow the sales trader to deal because the information barrier keeps staff outside corporate finance free to trade.
• C. Treat the unannounced bid as inside information and block the 09:20 personal trade under the restricted-list controls.
• D. Treat the 09:20 personal trade as front running because it would occur before the announcement reaches the market.

Best answer: C

What this tests: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

Explanation: A proposed takeover at 620p compared with a previous close of 500p represents a 120p premium, or 24%. Before announcement, that is non-public information likely to have a significant effect on Target’s share price. The restricted list is therefore an appropriate trading restriction, including for personal account dealing. An information barrier controls the flow of information between corporate finance and the securities business, but it does not override a restricted-list prohibition. Front running is different: it involves trading ahead of a client order using knowledge of that order. Here, no client order has been received, so the concern is inside information and restricted trading rather than front running.

• Front running requires misuse of knowledge of a client order; no client order is present.
• Information barriers help contain inside information, but restricted-list controls can still prevent trading.
• A post-announcement price below the offer price does not remove price sensitivity; the shares still moved sharply from 500p to 612p.

The proposed 620p offer is a 24% premium to the 500p close and was non-public before 11:00, so trading should be restricted.

Question 4

Topic: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

A securities adviser is reviewing a UK listed ordinary share for possible inclusion in a client’s long-term portfolio. The client has a seven-year horizon, accepts normal equity risk, and wants capital growth with some dividend income.

Key review notes:

• Revenue and free cash flow have grown for the last three years.
• Operating margin is above the sector median, and debt to equity is below the peer-group average.
• Dividend cover is 2.3 times.
• Management has a credible plan to expand recurring service revenue, but the company faces a sector pricing review by its regulator in 18 months.
• The share price has fallen 4% over the past week on low trading volume.

Which approach best reflects the use of fundamental analysis for this equity decision?

• A. Focus only on dividend cover because income sustainability is the sole relevant factor for a long-term equity holding.
• B. Buy the share because the recent 4% fall creates a short-term entry point regardless of the company’s financial position.
• C. Assess whether earnings quality, cash generation, financial strength, dividend sustainability, management strategy, and regulatory risk support value relative to the share price.
• D. Base the decision mainly on the latest price and volume pattern because recent market sentiment is the primary fundamental signal.

Best answer: C

What this tests: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

Explanation: Fundamental analysis supports longer-term equity decisions by examining the business behind the share, not just recent price movements. Quantitative evidence includes revenue growth, margins, free cash flow, gearing, and dividend cover. Qualitative evidence includes management quality, competitive position, strategy, industry outlook, and regulatory risks. In this case, the company’s improving cash flow, margins, lower gearing, and dividend cover support further valuation work, while the forthcoming regulatory review is a material risk to assess rather than ignore. The aim is to compare the company’s underlying prospects and risks with the current share price to judge whether the security is suitable for the client’s objectives and time horizon.

• A recent price fall may be relevant context, but it is not enough to justify a long-term equity purchase without business analysis.
• Price and volume patterns are associated more with technical analysis than fundamental analysis.
• Dividend cover is useful, but fundamental analysis is broader than a single income measure.

Fundamental analysis combines financial metrics with business and management factors to judge long-term value and risks.

Question 5

Topic: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

A securities adviser is reviewing a UK-listed ordinary share for a client who wants to understand short-term price behaviour and market sentiment, rather than the issuer’s intrinsic value or the economic outlook. Which observation is the single best example of a technical-analysis signal?

• A. The share price has broken above a recent resistance level on higher-than-average trading volume.
• B. The company’s dividend cover has improved because earnings have risen faster than dividends.
• C. Consensus forecasts suggest lower interest rates may support equity valuations over the next year.
• D. The company’s P/E ratio is lower than the average for comparable listed companies.

Best answer: A

What this tests: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

Explanation: Technical analysis focuses on patterns in market data, especially price movements, trading volume, momentum, support and resistance levels, and trend indicators. A share price breaking above resistance on higher volume is therefore a technical signal because it reflects observed market behaviour. Fundamental company analysis instead assesses the issuer’s financial position and valuation using factors such as earnings, dividends, dividend cover, cash flow, gearing, and P/E ratios. Macroeconomic indicators relate to the wider economic environment, such as interest rates, inflation, GDP growth, or employment trends. In this case, the client is asking about short-term price behaviour and sentiment, so the price-and-volume breakout is the best fit.

• Improved dividend cover is fundamental company analysis because it uses earnings and dividend data.
• A lower P/E ratio is a valuation measure used in fundamental analysis, even though it may affect investment opinion.
• Interest-rate expectations are macroeconomic context, not a chart-based technical signal.

A resistance breakout confirmed by volume uses price and trading activity, which are core inputs for technical analysis.

Question 6

Topic: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

Mercia Engineering plc is planning an equity issue to fund expansion. The founders hold 52% of the voting rights and do not want the issue to reduce their control. The company wants permanent capital rather than borrowings, and advisers say target investors are mainly seeking participation in future profit growth and are less concerned about voting influence. Which share class would be the single best fit for the issuer’s objective?

• A. Preference shares, because they normally provide the same capital growth exposure as ordinary shares without voting rights.
• B. Ordinary shares with full voting rights, because they preserve founder control while offering residual profit participation.
• C. Split-capital share classes, because they are the standard structure for an operating company that wants to raise expansion capital without new votes.
• D. Non-voting ordinary shares, because they can provide equity participation while limiting dilution of voting control.

Best answer: D

What this tests: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

Explanation: Ordinary shares usually give investors residual participation in profits and capital growth, but they commonly carry voting rights. Issuing more voting ordinary shares would reduce the founders’ voting control. Non-voting ordinary shares can be attractive to an issuer that wants permanent share capital and wants investors to share in future upside without altering control. Preference shares may help limit voting dilution, but they are typically designed around a fixed or preferential dividend and priority rights, so they do not normally provide the same growth exposure as ordinary shares. Split-capital structures are more associated with investment companies that separate income and capital entitlements for different investor needs, rather than a straightforward operating-company expansion issue.

• Full voting ordinary shares fit growth participation, but they would weaken the founders’ control position.
• Preference shares may suit income-seeking investors, but their fixed or preferential rights do not match the stated growth-participation objective.
• Split-capital structures divide income and capital risk in investment-company structures; they are not the natural solution for this operating-company control issue.

Non-voting ordinary shares match the need for permanent equity capital and growth participation without giving new investors voting power.

Question 7

Topic: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

A UK retail client wants exposure to an overseas company, Europa Motors SA, but does not want to open a foreign custody account or trade on the local exchange. The adviser compares the direct share with a London-traded depositary receipt.

The sterling value of the underlying shares per receipt is \(2 \times €24.00 \div 1.20 = £40.00\). Which reason best explains why the client may prefer the depositary receipt to buying the overseas shares directly?

• A. It prevents exchange-rate movements from affecting the sterling value of the investment.
• B. It provides exposure to the overseas shares through a sterling-traded instrument with more familiar settlement and custody arrangements.
• C. It removes the investor’s exposure to movements in the overseas company’s share price.
• D. It guarantees that dividends will be higher than those paid on the ordinary shares.

Best answer: B

What this tests: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

Explanation: A depositary receipt represents an interest in shares of an overseas company, with the underlying shares normally held by a depositary or custodian. The calculation shows that one receipt represents two ordinary shares worth about £40 in sterling, close to the quoted receipt price of £40.50. The investor is therefore gaining substantially similar economic exposure to the overseas equity. The practical attraction is access: the receipt may trade in a more familiar market and currency, using local settlement and custody arrangements, without the investor needing to deal directly on the foreign exchange or arrange overseas custody. The receipt does not remove the commercial risk of the company or the currency exposure embedded in the overseas shares.

• Removing share-price risk is incorrect because the receipt’s value is linked to the underlying overseas equity.
• Higher dividends are not guaranteed; distributions depend on the underlying company and the receipt terms.
• Sterling quotation does not eliminate currency risk because the underlying shares are denominated in the overseas market’s currency.

The receipt closely reflects the value of the underlying overseas shares while allowing the investor to trade and hold the exposure through a more accessible market structure.

Question 8

Topic: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

A retail client with £30,000 held for a flat deposit in 10 months asks to use £6,000 as margin for a CFD on a single US technology share. The client has previously held only cash ISAs and UK equity income funds, says they would be uncomfortable losing more than a small part of the deposit, and cannot clearly explain how margin close-out works. What is the single best response?

• A. Recommend a covered warrant instead, because paying a premium makes the exposure suitable for a short-term deposit need.
• B. Recommend a spread bet instead, because the tax treatment and margin requirement make it more suitable than a CFD.
• C. Proceed only if a stop-loss order is added, because this removes the main risk of leveraged equity exposure.
• D. Advise that the CFD is unsuitable because the leveraged exposure conflicts with the client’s short time horizon, liquidity need, loss tolerance, and understanding.

Best answer: D

What this tests: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

Explanation: Leveraged or derivative-linked equity exposure can be unsuitable where the client needs capital within a short period, has a low capacity or willingness to absorb loss, or does not understand how the product works. A CFD on a single share magnifies market movements and can trigger rapid losses or margin close-out. Here, the money is earmarked for a flat deposit in 10 months, so liquidity and capital preservation are central. The client’s limited experience and inability to explain margin close-out are also decisive. The appropriate response is to identify the CFD as unsuitable rather than trying to make the trade acceptable through a different wrapper or order type.

• A stop-loss can fail to provide certainty in fast or gapping markets and does not solve the client’s short horizon or understanding problem.
• A covered warrant may limit loss to the premium, but it is still derivative-linked equity exposure and does not meet the stated need for deposit capital.
• A spread bet is also leveraged and speculative; tax treatment does not overcome the suitability concerns.

The client needs accessible capital soon and does not have the risk tolerance or product understanding needed for leveraged single-share CFD exposure.

Question 9

Topic: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

A retail client wants short-term leveraged exposure to a rise in a UK-listed share. The client does not want shareholder rights, is not willing to meet margin calls, and wants the maximum loss to be limited to the initial cash paid. The client also prefers a standardised contract traded on a regulated derivatives exchange. Which choice best applies the risk-return trade-off?

• A. Enter into a long contract for difference on the share.
• B. Write a put option on the share.
• C. Place a long spread bet on the share price.
• D. Buy an exchange-traded call option on the share.

Best answer: D

What this tests: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

Explanation: A bought call option is an equity-linked exposure that gives the holder the right, but not the obligation, to buy the underlying share at the exercise price. For the buyer, the loss is limited to the premium paid, while potential gains increase if the share price rises sufficiently. Exchange-traded options also have standardised contract terms. CFDs and spread bets can provide leveraged exposure to share price movements, but they are margin-based products and do not match the client’s requirement to avoid margin calls. Writing an option is different from buying one: the writer receives a premium but takes on obligations and potentially substantial downside exposure.

• A long CFD gives leveraged exposure but is margin-based, so it does not fit the requirement to avoid margin calls.
• A long spread bet can track a rising share price, but it is also leveraged and margin-based rather than premium-limited.
• Writing a put option creates an obligation and downside risk; it is not a limited-loss bought exposure.

A bought call option gives upside equity exposure through a standardised exchange-traded contract, with the buyer’s maximum loss limited to the premium paid.

Question 10

Topic: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

A UK company is already listed and wants to raise £80 million of new ordinary share capital to fund an acquisition. The board wants existing shareholders to have the first opportunity to subscribe in proportion to their current holdings, and wants shareholders who do not subscribe to be able to sell their entitlement in the market. Which capital-raising method is the single best fit?

• A. Placing
• B. Rights issue
• C. Secondary sale by existing shareholders
• D. Initial public offering

Best answer: B

What this tests: Equities, Corporate Securities, Issuance, and Derivative-Linked Instruments

Explanation: A rights issue is the best fit where a listed company raises new equity while respecting existing shareholders’ pre-emption position. Existing shareholders receive the right to buy new shares in proportion to their current holdings, commonly at a discount. If the rights are renounceable, a shareholder who does not want to invest more cash can sell the entitlement in the market. An IPO is used when shares are first offered to the public and admitted to trading, not where an already listed company is raising more capital. A placing can raise capital quickly, but it is usually directed at selected investors rather than all shareholders pro rata. A secondary sale transfers existing shares from selling shareholders to buyers and does not raise new money for the company.

• An IPO would be relevant for first admission or first public offering, not for an already listed issuer raising additional equity.
• A placing may raise new capital, but it does not normally give all existing shareholders tradable pro rata entitlements.
• A secondary sale may increase public float or allow existing holders to exit, but the sale proceeds go to the selling shareholders, not the company.

A rights issue offers new shares to existing shareholders pro rata, usually at a discount, with tradable rights if they choose not to subscribe.

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