CFA Program Curriculum: Equity Investments (Learning Modules 1–8)

250 comprehensive practice flashcards covering market organization, security market indexes, market efficiency, overview of equity securities, company analysis (past, present, and forecasting), industry and competitive analysis, and equity valuation models.

Financial System

The collection of markets and financial intermediaries that facilitates the transfer of financial assets, real assets, and financial risks among entities across space and time.

Equilibrium Interest Rate

The expected rate of return at which the aggregate supply of funds for investing (savings) equals the aggregate demand for funds through borrowing and equity issuance.

Allocational Efficiency

An economic state in which a financial system successfully directs scarce capital funds to the investment projects that are most productive.

Public Securities

Securities that are legally registered to trade in public markets, such as on exchanges or through dealer networks, and are subject to mandatory regulatory disclosure standards.

Private Securities

Securities that are not registered for public trading and are typically sold directly to qualified institutional or accredited investors, characterized by limited liquidity and minimal public disclosure.

Derivative Contracts

Financial contracts whose economic values depend on or are derived from the market prices of specified underlying assets, such as commodities, equities, interest rates, or indices.

Spot Markets

Markets in which trading instruments, assets, or financial contracts are bought and sold for immediate or near-immediate delivery (typically within three business days).

Primary Capital Markets

Markets where corporations, governments, and other issuers sell newly issued securities to initial investors, with proceeds flowing directly to the issuer.

Secondary Capital Markets

Markets in which previously issued securities are traded among existing investors, with transaction funds flowing strictly between traders rather than to the issuing entity.

Money Markets

Financial markets that trade short-term debt instruments having original maturities of one year or less, such as commercial paper, negotiable certificates of deposit, and Treasury bills.

Capital Markets

Financial markets that trade longer-term instruments, such as equities and bonds with maturities greater than one year, whose values depend on issuer performance and future cash flows.

Traditional Investments

An asset class comprising publicly traded debt securities, publicly traded equities, and shares in pooled investment vehicles that exclusively hold public debt or equity.

Alternative Investments

Assets outside traditional debt and equity categories, including private equity, hedge funds, commodities, real estate, securitized debts, machinery, and collectibles.

Repurchase Agreement (Repo)

A short-term lending transaction where a borrower sells an asset (typically a high-quality bond) to a lender with an agreement to buy it back later at a slightly higher price based on an agreed interest rate.

Cumulative Preferred Shares

Preferred shares requiring that any unpaid dividends omitted in prior periods accumulate and be paid in full before any dividends can be distributed to common shareholders.

Warrants

Corporate securities that grant the holder the legal right, but not the obligation, to purchase a specified number of common shares directly from the issuing company at a predetermined exercise price.

Open-Ended Mutual Fund

A pooled investment vehicle that creates new shares when investors purchase and redeems existing shares on demand at a price directly based on the fund's per-share net asset value.

Closed-End Fund

A pooled investment fund that issues a fixed number of shares in an initial offering that cannot be redeemed with the fund, trading instead on secondary markets at market-determined prices.

Exchange-Traded Fund (ETF)

An open-ended pooled investment fund whose shares trade continuously in secondary markets like common stock, whose market price converges to net asset value via authorized participant arbitrage.

Authorized Participants (APs)

Specialized institutional broker-dealers who possess the exclusive contractual right to create and redeem shares directly with an ETF, typically through in-kind transactions.

Asset-Backed Securities

Securities whose cash flows and valuations are derived from and secured by an underlying pool of financial assets, such as mortgages, auto loans, or credit card debt.

Tranches

Distinct risk and payment classes created within a securitization structure that possess tiered priorities to the cash flows and loss exposures of the underlying asset pool.

Hedge Funds

Private investment partnerships for wealthy and institutional investors that utilize diverse, active strategies—often including short sales and leverage—and compensate managers through management and incentive fees.

Reserve Currencies

Currencies held in substantial quantities by foreign central banks and national monetary authorities, primarily the US dollar and the euro.

Real Estate Investment Trust (REIT)

A corporate entity or trust that pools capital to invest directly in income-producing real estate properties or mortgages, issuing liquid, tradable shares to public investors.

Forward Contract

A customized bilateral agreement between two parties to exchange a specified asset at a predetermined price on a specified future date.

Counterparty Risk

The risk that the other participating party to a contractual agreement will fail to fulfill its contractual liabilities or financial settlement obligations.

Futures Contract

A standardized exchange-traded forward contract for which a clearinghouse interposes itself to guarantee performance of all buyers and sellers.

Clearinghouse

An intermediary institution that guarantees financial performance on contracts by acting as the buyer to every seller and the seller to every buyer, eliminating bilateral counterparty risk.

Initial Margin (Futures)

The cash or collateral deposit that a trader must post with a clearinghouse or broker upon establishing a new futures position to protect against potential default.

Maintenance Margin (Futures)

The minimum equity balance that a trader's futures margin account must maintain daily to prevent a margin call that requires replenishment to the initial margin level.

Swap Contract

A bilateral derivative contract in which two counterparties agree to exchange a series of future periodic cash flows based on underlying variables such as interest rates or commodity prices.

Call Option

A derivative contract granting the option holder the right, but not the obligation, to purchase an underlying instrument at a specified strike price on or before an agreed date.

Put Option

A derivative contract granting the option holder the right, but not the obligation, to sell an underlying instrument at a specified strike price on or before an agreed date.

Credit Default Swap (CDS)

A bilateral credit derivative contract in which the seller agrees to compensate the buyer for principal losses in the event that a reference debt issuer defaults on its obligations.

Block Brokers

Specialized brokerage agents who assist institutional clients with the discrete matching and execution of large-volume trades to avoid moving market prices.

Alternative Trading Systems (ATSs)

Electronic trading venues, also known as multilateral trading facilities or electronic communications networks, that match buy and sell orders like exchanges but lack issuer regulatory authority.

Dark Pools

Alternative trading systems that match orders without publicly displaying their order books or order sizes, protecting institutional traders from adverse price movements prior to execution.

Liquidity

The ability of market participants to buy or sell significant quantities of an asset quickly and on demand with minimal transaction costs and small price concessions.

Arbitrageurs

Traders who seek risk-free profits by simultaneously buying and selling identical or economically equivalent instruments at differing prices in different markets.

Special Purpose Vehicle (SPV)

A legal bankruptcy-remote trust or corporation formed by an intermediary specifically to hold purchased pooled assets and issue asset-backed securities to investors.

Short Rebate Rate

The market-determined rate of interest that a securities lender pays back to a short seller on the cash collateral posted from the sale proceeds of borrowed stock.

Financial Leverage

The use of borrowed debt to finance asset purchases, increasing the sensitivity of an investor's equity returns and amplifying both percentage gains and losses.

Leverage Ratio

The ratio of the total market value of a position to the value of the supporting equity investment, equal to $1 / M$ where $M$ is the minimum margin requirement.

Stop Order

An order instruction that suspends trade execution until a transaction in the market occurs at or beyond a specified stop price condition, converting it into a valid market or limit order.

Security Market Index

A statistical portfolio metric constructed of marketable securities to measure and represent the aggregate value and performance of a target security market, market segment, or asset class.

Constituent Securities

The individual underlying securities selected and held within a security market index portfolio according to specific rules.

Price Return Index

A security index version that reflects only the price movements and percentage capital appreciation of its constituent securities, omitting cash distributions.

Total Return Index

A security index version that measures both the price changes of constituent securities and the compounding effect from the full reinvestment of all dividends and interest received.

Index Divisor

A base scaling number established at index inception that is periodically adjusted to prevent changes in index value caused by non-market events like stock splits or constituent replacements.

Target Market (Index Construction)

The specific market, economic sector, geographic area, or asset class that an index provider selects an index to represent.

Price Weighting

An index weighting methodology in which each security's weight equals its per-share price divided by the sum of all constituent share prices, giving high-priced stocks disproportionate influence.

Equal Weighting

An index weighting methodology that allocates an identical monetary proportion ($1 / N$) of the portfolio to each constituent security at the beginning of each measurement period.

Market-Capitalization Weighting

An index weighting method in which each security's weight is determined by its total market capitalization (share price multiplied by shares outstanding) divided by total index market capitalization.

Market Float

The number of a company's outstanding shares that are actively available to the investing public, calculated by excluding shares held by controlling founders, governments, and corporations.

Free-Float-Adjusted Market-Capitalization Weighting

A market-cap index weighting approach that adjusts constituent shares to exclude closely held blocks and shares legally unavailable to foreign international investors.

Fundamental Weighting

An index weighting scheme that assigns constituent weights using non-price fundamental size metrics, such as revenues, earnings, dividends, book value, or cash flow.

Value Tilt

The structural property of fundamentally weighted indexes that results in higher portfolio allocations to stocks with higher ratios of fundamentals to market value (such as high dividend yields).

Index Rebalancing

The periodic scheduled adjustment of constituent weights back to their specified target proportions determined by the index's chosen weighting model.

Index Reconstitution

The process of updating an index's constituent list by reapplying the screening criteria to retain, delete, or add individual securities, resulting in index portfolio turnover.

Gauge of Market Sentiment

The use of widely quoted broad market indexes to capture collective investor confidence and general market sentiment on a daily basis.

Systematic Risk (Beta)

A statistical measure of the non-diversifiable risk of an individual asset or portfolio relative to the market portfolio of all risky assets.

Alpha (Performance Measurement)

The risk-adjusted excess rate of return earned by an actively managed portfolio relative to a passive benchmark having the identical level of systematic risk.

Broad Market Equity Index

An equity index designed to represent an entire national or regional stock market, typically capturing more than 90 percent of the target market's aggregate capitalization.

Multi-Market Equity Index

An equity index family that aggregates individual national market indexes across regions or economic development groupings (developed, emerging, and frontier markets).

GDP-Weighted Index

A multi-market index construction approach where individual countries or regions are weighted according to their Gross Domestic Product rather than their equity market capitalizations.

Sector Index

An equity index designed to track the performance of companies belonging to a single specific economic sector, such as health care, energy, or consumer staples.

Style Index

An equity index that groups constituent securities based on market capitalization size categories (large, mid, small) and valuation/growth orientations (value versus growth).

Aggregate Fixed-Income Index

A comprehensive bond index, such as the Bloomberg Barclays US Aggregate Bond Index, that covers a wide universe of investment-grade government, corporate, and asset-backed securities.

Investment-Grade Bond Index

A bond index consisting strictly of debt issues rated BBB- or higher by Standard & Poor's or Baa3 or higher by Moody's.

High-Yield Bond Index

A fixed-income index that tracks corporate or sovereign debt securities rated below investment grade, also known as speculative-grade bonds.

Commodity Index

An alternative investment index that tracks baskets of commodities by holding and rolling exchange-traded futures contracts rather than physical commodity inventory.

Roll Yield

The component of a commodity futures index return that results from replacing expiring near-term futures contracts with longer-dated contracts trading at different price levels.

Contract Rollover

The operational procedure in commodity futures index management of selling contracts nearing expiration and concurrently purchasing replacement contracts with later settlement dates.

Real Estate Investment Trust (REIT) Index

An index composed of shares of publicly traded REITs, providing continuous market pricing and liquid performance tracking of commercial and residential property markets.

Appraisal Index

A real estate index constructed using periodic professional property valuations rather than open-market transaction prices, resulting in smoothed return patterns and understated volatility.

Repeat Sales Index

A real estate index based on observed transaction prices of identical individual physical properties that have sold multiple times over an extended period.

Hedge Fund Index

An index designed to reflect the collective performance of hedge funds, typically compiled from private research databases and constructed using equal weighting.

Survivorship Bias (Hedge Fund Indexes)

The upward performance distortion in a hedge fund database index caused by poor-performing or failed funds stopping their voluntary reporting and being dropped from the data.

Nikkei Stock Average Weighting

A modified price-weighting methodology used for the 225 blue-chip equities in Japan's Nikkei 225, where certain high-priced shares are down-weighted as a fraction of their share price.

Informationally Efficient Market

A market in which transaction prices reflect new information quickly and rationally, ensuring that prevailing prices fully incorporate all relevant past and present information.

Market Value

The current transaction price at which an asset can be purchased or sold between willing market participants in an open market.

Intrinsic Value

The fundamental worth of an asset based on a complete understanding of its investment characteristics and the discounted present value of its future expected cash flows.

Regulation FD (Fair Disclosure)

A regulatory rule enforced by the US SEC requiring public companies that disclose material nonpublic information to selected market professionals to disclose it simultaneously to the general public.

Insider Trading

The illegal practice of buying or selling securities while in possession of material, nonpublic information about the issuer.

Bounds of Arbitrage

The pricing disparity range between two markets within which cross-market arbitrage cannot profitably eliminate price differences because the gap is smaller than transaction costs.

Information-Acquisition Costs

The expenses incurred by active investors and fundamental analysts in obtaining, researching, and processing private or non-obvious data to determine an asset's intrinsic value.

Abnormal Return

The realized return on a security or portfolio in excess of the return expected given the asset's systematic risk profile, calculated as actual return minus expected return.

Weak-Form Efficient Market Hypothesis

The proposition that current security prices fully reflect all historical market data, including past prices and trading volume, rendering technical analysis unable to earn abnormal profits.

Technical Analysis

An investment methodology that attempts to predict future price changes by examining historical trading patterns, market charts, and volume data.

Semi-Strong-Form Efficient Market Hypothesis

The proposition that security prices rapidly and accurately adjust to all publicly available information, implying that fundamental analysis cannot consistently yield abnormal risk-adjusted returns.

Fundamental Analysis

The examination of public corporate financial reports, industry dynamics, and macroeconomic data to estimate intrinsic value and uncover mispriced securities.

Event Study

An empirical research tool used to evaluate market efficiency by statistically measuring abnormal returns around the exact announcement date of a specific corporate event.

Strong-Form Efficient Market Hypothesis

The proposition that security prices fully incorporate all public and private (insider) information, meaning that even corporate insiders cannot earn abnormal profits.

Market Anomaly

An observed, persistent deviation in security prices that is unexplainable by fundamental risk models and appears contrary to the efficient market hypothesis.

Data Mining (Data Snooping)

The statistical practice of searching through historical financial datasets to discover correlations or trading rules that worked purely by chance without economic rationale.

January Effect (Turn-of-the-Year Effect)

A calendar anomaly where equity securities, particularly volatile small-capitalization stocks, exhibit abnormally high returns during the first five trading days in January.

Window Dressing

The practice of portfolio managers selling riskier or losing assets prior to period-end reporting dates to make their portfolios appear more conservative to investors.

Weekend Effect

A calendar anomaly characterized by abnormally positive stock returns on Fridays followed by negative average returns on Mondays.

Overreaction Effect

An empirical pricing anomaly where investors overreact to dramatic unexpected news, causing past multi-year 'loser' portfolios to subsequently outperform past 'winner' portfolios.