CISI Introduction to Investment Quick Review

Exam identity and how to use this page

This review is designed for candidates who already have study material and now need a fast, structured recap before using topic drills, mock exams, original practice questions, and detailed explanations. It is not affiliated with the Chartered Institute for Securities & Investment and does not replace the official syllabus.

Use it in three passes:

1. First pass: scan the tables and decision rules.
2. Second pass: cover the right-hand side of tables and test yourself.
3. Third pass: use a question bank to expose weak areas, then return to the relevant section.

High-yield mental map

The CISI Introduction to Investment exam expects you to recognise the basic structure of investment markets, instruments, risks, institutions, regulation, and client-facing principles.

Core investment principles

Risk and return

Higher expected return usually requires accepting higher risk, but not every risk is rewarded.

Main risk types

Economic indicators and market impact

Economic forces to connect quickly

Monetary vs fiscal policy

Common trap: Lower interest rates may support asset prices, but they can also signal weak economic conditions. Read the whole scenario, not just one data point.

Markets and market participants

Primary vs secondary markets

Exam trap: Buying shares on an exchange after an IPO is normally a secondary-market transaction. The company does not receive new capital from ordinary secondary trading.

Exchange-traded vs OTC

Order-driven vs quote-driven

Key participants

Equities quick review

Ordinary shares

Ordinary shares represent ownership in a company. Shareholders may receive dividends and may benefit from capital growth, but dividends are not guaranteed and shareholders rank behind creditors if the company is wound up.

Preference shares

Preference shares usually have priority over ordinary shares for dividends and/or capital repayment, but may have limited voting rights and less growth potential.

Corporate actions

Equity valuation ratios

Useful formulas:

\[ \text{Dividend yield} = \frac{\text{Annual dividend per share}}{\text{Market price per share}} \times 100 \]\[ \text{Earnings per share} = \frac{\text{Profit attributable to ordinary shareholders}}{\text{Number of ordinary shares}} \]\[ \text{P/E ratio} = \frac{\text{Market price per share}}{\text{Earnings per share}} \]

Bonds and fixed income quick review

Bond basics

A bond is a debt instrument. The investor lends money to the issuer and expects interest payments plus repayment at maturity, subject to issuer creditworthiness.

Price and yield

The most important bond relationship:

Bond prices and market yields generally move in opposite directions.

If market interest rates rise, existing fixed-coupon bonds usually become less attractive, so their prices tend to fall. If market interest rates fall, existing fixed-coupon bonds usually become more attractive, so their prices tend to rise.

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

Bond risk table

Government vs corporate bonds

Common trap: A bond can be “safe” from credit default relative to equities but still lose market value if sold before maturity.

Funds and pooled investments

Funds pool money from investors and invest according to a stated objective. They can offer diversification and professional management, but introduce charges, manager risk, and product-structure risks.

Open-ended vs closed-ended

Active vs passive management

ETFs

Exchange-traded funds are traded on an exchange and often track an index or basket.

Fund charges and performance

Common trap: Diversification inside a fund does not automatically make the fund low risk. A specialist emerging-market equity fund is diversified across holdings but still high risk.

Derivatives quick review

Derivatives derive value from an underlying asset, rate, index, or event. They can be used for hedging, speculation, arbitrage, or efficient portfolio management.

Main derivative types

Calls and puts

Memory rule:
Call up: a call benefits from price rising.
Put down: a put benefits from price falling.

Hedging vs speculation

Common trap: Derivatives are not inherently “bad” or only speculative. The risk depends on use, structure, exposure, leverage, and controls.

Investment returns and basic calculations

Return components

\[ \text{Total return} = \text{Income received} + \text{Capital gain or loss} \]\[ \text{Percentage return} = \frac{\text{Ending value} - \text{Starting value} + \text{Income}}{\text{Starting value}} \times 100 \]

Nominal vs real return

Nominal return is the stated return before adjusting for inflation. Real return adjusts for inflation and reflects purchasing power.

Approximate relationship:

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

Common trap: A positive nominal return can still be a negative real return if inflation is higher.

Investor objectives and suitability thinking

Even where a question is not framed as formal advice, many scenarios test whether you can match investment features to investor needs.

Suitability decision prompts

Ask these in order:

1. What is the investor trying to achieve? Income, growth, preservation, hedging, liquidity?
2. When is the money needed? Short-term needs reduce capacity for volatility.
3. Can the investor afford loss? Capacity for loss is not the same as willingness to take risk.
4. What risks dominate? Market, credit, liquidity, currency, inflation?
5. What product structure fits? Direct security, fund, derivative, deposit, insurance-linked solution?
6. What costs, tax, and constraints apply? Charges, tax treatment, access restrictions, ethical constraints.

    flowchart TD
	    A[Scenario question] --> B{Main objective?}
	    B -->|Preserve capital / short term| C[Cash or low-risk liquid instruments]
	    B -->|Income| D[Bonds, income shares, income funds]
	    B -->|Growth / long term| E[Equities or growth funds]
	    B -->|Diversification / simple access| F[Pooled fund or ETF]
	    B -->|Risk reduction| G[Hedge, diversify, or adjust asset allocation]
	    B -->|Specific price/rate exposure| H[Derivative may be relevant]
	    C --> I[Check inflation and credit risk]
	    D --> J[Check income sustainability and capital risk]
	    E --> K[Check volatility and time horizon]
	    F --> L[Check structure, charges, NAV, tracking]
	    G --> M[Check basis risk and residual risk]
	    H --> N[Check leverage and obligations]

Regulation, conduct, and ethics

The exam may test broad principles rather than detailed legal thresholds. Always rely on the current official material for jurisdiction-specific rules, but know these core themes.

Regulatory objectives

Conduct expectations

Financial crime and market abuse

Common trap: Insider dealing is not limited to company directors or employees. The issue is possession and misuse of inside information.

Tax awareness

Do not assume tax rates or allowances unless the question provides them or the current syllabus requires them. For quick review, focus on identifying the type of tax issue.

Exam trap: Tax affects net return, not just gross return. Two investments with the same pre-tax return can produce different after-tax outcomes.

Settlement, custody, and administration

Trade lifecycle

Common trap: Trade date and settlement date are not the same thing. Ownership, payment, and entitlement questions often depend on the relevant date and market rules.

Client assets

Fast comparison: major asset classes

Scenario decision rules

Common mistakes to eliminate

Product mistakes

• Confusing coupon with yield.
• Assuming bonds cannot lose money.
• Treating all funds as low risk because they are diversified.
• Forgetting closed-ended funds can trade at a premium or discount to NAV.
• Assuming ETFs always exactly equal NAV.
• Confusing a rights issue with a bonus issue.
• Treating derivatives as always speculative, rather than recognising hedging use.
• Forgetting an option buyer has a right, while many derivative contracts create obligations.

Market-structure mistakes

• Confusing primary-market issuance with secondary-market trading.
• Assuming the issuer receives cash whenever its shares are traded.
• Mixing up broker as agent and dealer as principal.
• Ignoring bid-offer spread as a cost.
• Forgetting settlement occurs after execution.

Risk mistakes

• Calling cash “risk-free” without considering inflation, credit, or currency.
• Ignoring liquidity risk in property, small companies, and specialist funds.
• Assuming diversification removes market-wide risk.
• Treating willingness to take risk as the same as capacity for loss.
• Ignoring time horizon when selecting investments.

Conduct mistakes

• Thinking conflicts only matter if actual harm occurs.
• Treating AML as proving a crime, rather than identifying and escalating suspicion.
• Assuming inside information only matters if received directly from the company.
• Forgetting communications must be clear, fair, and not misleading.

Quick calculation checklist

Before doing any calculation, identify:

1. What is being measured? Income yield, total return, EPS, P/E, bond yield?
2. What is the base value? Original investment, current market price, nominal value?
3. Is the question asking for percentage or cash amount?
4. Is income included or excluded?
5. Is the answer pre-tax or after-tax?
6. Are there charges, spreads, or currency conversions?

Final-week review plan

How to use question-bank practice effectively

Independent companion practice works best when it is diagnostic, not just repetitive.

1. Start with topic drills after each section of this review.
2. Mark guessed answers even if correct.
3. Read detailed explanations for both wrong and guessed questions.
4. Create an error log with three labels: knowledge gap, misread question, or calculation/process error.
5. Retest weak areas with fresh original practice questions.
6. Move to mock exams only after topic accuracy is stable.
7. Review the official syllabus language for any topic where practice explanations feel unfamiliar.

A good question bank should help you recognise how the same concept appears in different wording: for example, coupon vs yield, primary vs secondary market, open-ended vs closed-ended fund, hedge vs speculation, and income vs capital return.

Last check before practice

You are ready for mixed questions when you can explain these without notes:

• Why bond prices and yields move inversely.
• The difference between ordinary shares, preference shares, and bonds.
• How primary and secondary markets differ.
• How open-ended and closed-ended funds differ.
• What NAV means and why market price may differ from NAV.
• The difference between a call option and a put option.
• The difference between hedging and speculation.
• The main risks attached to cash, bonds, equities, funds, and derivatives.
• The purpose of AML, conflict management, and market-abuse rules.
• How income return, capital return, total return, and real return differ.

Next step: use this Quick Review as your checklist, then complete targeted topic drills and a timed mock using independent companion practice with original practice questions and detailed explanations.