Free CISI Intro Practice Questions: Equities

Use this focused CISI Intro page as a short practice test for Equities. 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

Which statement correctly describes how UK companies are formed and the difference between private and public companies?

• A. Both are created automatically when shares are first issued, and only a private company may offer shares to the public.
• B. Both are incorporated by registration, but only a public company may offer shares to the public.
• C. A public company is government-owned, while a private company is owned by individuals.
• D. A private company is unincorporated, while a public company becomes incorporated only after listing on a stock exchange.

Best answer: B

What this tests: Equities

Explanation: The key concept is incorporation. In the UK, a company comes into existence as a separate legal entity when it is registered and incorporated, rather than simply when it issues shares or starts trading. Both private and public companies are incorporated bodies with limited liability.

The main difference tested at this level is access to the public for share offers. A public company may offer shares to the public, whereas a private company may not. Being a public company does not mean it is owned by the government, and it does not need to be listed on a stock exchange in order to exist as a public company.

A common confusion is to mix up public ownership by investors with state ownership, or to assume incorporation only happens on listing.

• Shares issued first: issuing shares does not create the company; incorporation does, and private companies cannot offer shares to the public.
• Government ownership: “public” here means able to raise capital from the public, not owned by the state.
• Listing confusion: both private and public companies are incorporated; stock exchange listing is separate from incorporation.

In the UK, companies are created by incorporation, and the key distinction is that a public company may offer shares to the public whereas a private company may not.

Question 2

Topic: Equities

An ordinary share was priced at 200p at the start of the year and 230p at the end of the year. During the year, the shareholder received a 10p dividend. Which measure is calculated as \((230p - 200p + 10p) / 200p\)?

• A. Dividend yield
• B. Price/earnings ratio
• C. Earnings per share
• D. Total shareholder return

Best answer: D

What this tests: Equities

Explanation: Total shareholder return measures the overall return to a shareholder over a period. It includes both the change in the share price and any dividends received, then compares that total return with the starting share price. Here, the shareholder gains 30p from the price rise and receives a 10p dividend, giving a total return of 40p on an initial 200p share price, or 20%. Dividend yield uses dividend per share compared with the current share price. Earnings per share uses company earnings divided by the number of shares. The price/earnings ratio compares the share price with earnings per share.

• Dividend yield would focus only on the dividend relative to the share price, not the capital gain.
• Earnings per share is based on company profits attributable to each share, not shareholder return.
• Price/earnings ratio compares share price with earnings per share, not price movement plus dividends.

Total shareholder return combines capital gain or loss with dividends received, expressed relative to the starting share price.

Question 3

Topic: Equities

After an equity trade has been executed, what is the main role of a central counterparty (CCP)?

• A. Match buy and sell orders on the trading venue
• B. Maintain the issuer’s official register of shareholders
• C. Interpose itself between buyer and seller to reduce counterparty risk
• D. Hold client securities in safe custody

Best answer: C

What this tests: Equities

Explanation: The core concept here is clearing. Once an equity trade has been agreed, a central counterparty can interpose itself between the original buyer and seller. This means each side faces the CCP rather than facing each other directly, which helps manage the risk that one party fails before settlement is completed.

That is different from trading, registration, or custody. Matching orders is done by the exchange or trading venue before the trade is executed. Keeping the legal register of shareholders is the registrar’s role. Holding securities for investors is the role of a custodian or nominee service.

The key takeaway is that a CCP is a post-trade infrastructure function focused on clearing and counterparty risk.

• Order matching: matching buy and sell orders is a trading-venue function, which happens before clearing.
• Share register: maintaining the issuer’s official shareholder record is done by a registrar, not a CCP.
• Safe custody: holding securities for clients is a custody or nominee role, not a clearing role.

A CCP steps into the trade after execution, becoming the buyer to every seller and the seller to every buyer.

Question 4

Topic: Equities

An operations team is checking three equity records for a client.

For the records shown, how many shares have registered title, and how should records B and C be classified by holding form?

• A. 400 shares have registered title; B is dematerialised and C is immobilised.
• B. 1,000 shares have registered title; both B and C are dematerialised.
• C. 650 shares have registered title; B is immobilised and C is dematerialised.
• D. 750 shares have registered title; B is immobilised and C is bearer title.

Best answer: C

What this tests: Equities

Explanation: Registered title means an identified holder is entered on the issuer’s register. That holder might be the investor or a nominee. Bearer title is different: possession of the bearer certificate evidences title, rather than a name on the register. Record A is registered because the client is named on the register. Record C is also registered because the nominee is named on the register, giving 400 + 250 = 650 registered-title shares. Record B is not dematerialised because a physical bearer certificate still exists. It is immobilised because the certificate is held centrally while transfers are made by book entry. Record C is dematerialised because the holding is uncertificated in CREST and no paper certificate exists.

• Counting only 400 shares misses that a nominee name on the register is still registered title.
• Treating the bearer certificate in the vault as registered title confuses possession-based bearer title with register-based title.
• Calling both B and C dematerialised ignores the physical certificate still existing for the immobilised holding.

Records A and C have a named holder on the issuer register, so 400 + 250 = 650 registered-title shares; B is immobilised because a certificate is held centrally, while C is dematerialised because no certificate exists.

Question 5

Topic: Equities

In relation to ordinary shares, what is a bonus issue, also called a scrip or capitalisation issue?

• A. A cash payment made from company profits
• B. Existing shares split into smaller nominal values
• C. New shares offered for cash, usually at a discount
• D. Free extra shares issued proportionately by capitalising reserves

Best answer: D

What this tests: Equities

Explanation: A bonus issue, scrip issue, and capitalisation issue are commonly used to describe the same type of corporate action at this level. The company issues additional fully paid shares to existing shareholders free of charge, usually in proportion to what they already own, and does this by capitalising retained reserves. This increases the number of shares in issue but does not raise fresh money for the company from investors.

The key distinction is that shareholders do not pay for the new shares. A rights issue, by contrast, asks shareholders to buy new shares for cash. A stock split changes the number and nominal value of shares, but it is not the same as capitalising reserves. A cash dividend is a payment, not a share issue.

• Rights issue confusion: Offering new shares for cash describes a rights issue, not a bonus or capitalisation issue.
• Stock split confusion: A stock split changes the share count and nominal value, but it does not involve capitalising reserves into fully paid shares.
• Dividend confusion: A cash payment from profits is a dividend, whereas a bonus issue gives additional shares instead of cash.

A bonus, scrip, or capitalisation issue gives existing shareholders additional fully paid shares without requiring extra cash from them.

Question 6

Topic: Equities

A company obtains a stock exchange listing and raises money by issuing new shares. After that, investors trade those shares with each other, and the quoted price changes as buy and sell orders interact. Which stock exchange role is this best illustrating?

• A. Providing listing, capital raising, trading, price discovery, and liquidity
• B. Guaranteeing sales at a fixed market price
• C. Setting dividends and future share prices
• D. Safeguarding assets and compensating investor losses

Best answer: A

What this tests: Equities

Explanation: A stock exchange has an important role in both the primary and secondary markets. In the primary market, it provides the framework for listing and access to investors when a company issues new shares to raise capital. In the secondary market, it provides a trading venue where existing investors buy and sell shares with each other.

As those buy and sell orders meet, the market price is discovered through supply and demand. Because investors can trade more easily on an organised market, listed shares are generally more liquid than shares without such a venue.

The key point is that the exchange facilitates trading and price formation; it does not guarantee a sale price or investment outcome.

• Fixed-price guarantee: An exchange does not promise that shares can be sold at a preset price; market prices move with supply and demand.
• Custody and protection: Safekeeping assets and compensating eligible losses are not the exchange’s core market function.
• Company decisions: Dividends come from company policy, and future share prices are set by the market rather than by the exchange.

A stock exchange supports admission and new issuance in the primary market, then ongoing trading, price discovery, and liquidity in the secondary market.

Question 7

Topic: Equities

A UK retail client buys listed shares through an online platform. To reduce settlement risk and protect the holding afterwards, which statement best applies this principle?

• A. The exchange becomes the counterparty in clearing, and the registrar then holds the shares in custody.
• B. Clearing can interpose a central counterparty, and settled shares are then held by a nominee or custodian.
• C. The registrar interposes itself in clearing, and the exchange then holds the shares safely.
• D. The custodian becomes the buyer’s counterparty in clearing, and the broker then owns the shares.

Best answer: B

What this tests: Equities

Explanation: The core concept is that different parties perform different roles in the equity settlement chain. After a trade is executed on a trading venue, clearing may insert a central counterparty between buyer and seller to reduce bilateral counterparty risk before settlement. Settlement then completes the exchange of cash for securities through the settlement system, and the holding is typically kept in custody, often in a nominee account for a retail client.

A registrar mainly maintains the issuer’s share register, while the exchange is primarily the trading venue. A custodian or nominee is concerned with safekeeping after settlement rather than becoming the trade counterparty. The key distinction is between reducing pre-settlement default risk and holding the asset securely once title has been transferred.

• The registrar keeps ownership records for the issuer; it does not usually step between buyer and seller in clearing.
• A custodian or nominee is for safekeeping after settlement, not for becoming the market counterparty.
• The exchange is where trading occurs; it is not normally the body that holds client assets in custody.

A central counterparty helps manage bilateral default exposure before settlement, while a nominee or custodian provides post-settlement safekeeping.

Question 8

Topic: Equities

A company has raised new equity through an initial public offer and its shares have been admitted to trading on a recognised stock exchange. An investor who received shares in the offer now wants to sell them. What is the correct next step in the market process?

• A. The investor’s broker places a sell order on the secondary market, where it can be matched with buy orders at market prices.
• B. The investor applies to the FCA for a new listing before the shares can be sold.
• C. The stock exchange buys the shares from the investor and holds them until another investor is found.
• D. The investor sells the shares back to the issuing company at the original offer price.

Best answer: A

What this tests: Equities

Explanation: A stock exchange supports both primary and secondary market activity. In the primary market, a company issues shares to raise capital, often after meeting listing or admission requirements. Once the shares are listed or admitted to trading, investors can buy and sell them in the secondary market. Orders placed through brokers interact with other buy and sell orders, helping establish market prices through price discovery. This ongoing ability to trade gives investors liquidity, although it does not guarantee a particular price or an immediate sale in all conditions.

• Selling back to the issuer at the original offer price confuses secondary trading with the primary issue.
• Applying to the FCA for a new listing is unnecessary for an ordinary secondary-market sale of already admitted shares.
• The exchange provides the trading venue and market infrastructure; it does not normally act as the buyer from investors.

After listing and the primary issue, later investor-to-investor trading takes place in the secondary market, supporting price discovery and liquidity.

Question 9

Topic: Equities

A UK retail investor wants current income from ordinary shares. Northgate plc shares are trading at 275p. The company paid an interim dividend of 4p and a final dividend of 7p per share for the last year. What is the best estimate of the historic dividend yield?

• A. 4.00%
• B. 11.00%
• C. 2.55%
• D. 7.00%

Best answer: A

What this tests: Equities

Explanation: Dividend yield is the annual dividend per share divided by the current market price per share. In this scenario, the investor wants current income, so the relevant figure is the total dividend for the last year, not just one of the dividend payments. Add the interim 4p and final 7p to get 11p, then divide by the share price of 275p.

• Total annual dividend = 4p + 7p = 11p
• Dividend yield = 11p / 275p = 0.04
• Convert to a percentage = 4.00%

Using pence for both figures is fine because the units cancel out. The key trap is forgetting to include both dividends before calculating the yield.

• Final payment only: 2.55% comes from using only the 7p final dividend and ignoring the 4p interim dividend.
• Dividend is not yield: 7.00% treats the final dividend amount as if it were already a percentage, without comparing it with the share price.
• Total dividend is not yield: 11.00% uses the annual dividend in pence as though it were the percentage return, instead of dividing by 275p.

Dividend yield uses the total annual dividend of 11p divided by the current share price of 275p, giving 4.00%.

Question 10

Topic: Equities

Which statement correctly describes the usual differences between ordinary shares, preference shares, and deferred shares?

• A. Preference shares usually receive unlimited dividends after ordinary shares; deferred shares usually have priority to capital repayment before preference shares.
• B. Ordinary shares and preference shares usually have identical rights; deferred shares differ only because they cannot be traded on a stock exchange.
• C. Ordinary shares usually have fixed dividends and capital priority; preference shares usually carry the main voting rights; deferred shares usually rank ahead of both.
• D. Ordinary shares usually carry votes and residual returns; preference shares usually have dividend and capital priority but limited upside; deferred shares usually rank after ordinary shares.

Best answer: D

What this tests: Equities

Explanation: Ordinary shares are the main risk-bearing shares in a company. They commonly carry voting rights and receive dividends only if declared, with returns linked to the company’s performance and share price. Preference shares normally have priority over ordinary shares for dividends and often for capital repayment, but their dividend is usually fixed or limited, so they usually have less upside and may have restricted voting rights. Deferred shares are lower-ranking shares. They commonly receive dividends or capital only after other classes, often after specified conditions are met.

• Giving ordinary shares fixed dividends and capital priority confuses them with preference shares.
• Saying ordinary and preference shares have identical rights ignores the usual priority and return differences.
• Placing deferred shares ahead of preference shares reverses their usual low-ranking position.

This correctly matches ordinary shares with residual risk and control, preference shares with priority but more limited returns, and deferred shares with the lowest ranking.

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