Equity Investments: CFA® Level I

It is 11–14% of the 2027 Level I exam. 44 learning outcomes across 12 learning modules.

370+ practice questions and 12 formula cards on this topic in the app.

Equity Instrument Features

• Set out the kinds of equity security
• Contrast public equity securities with private ones
• Explain depository receipts and investing in foreign equities
• Explain the return and risk features of equity securities

Equity Issuance and Trading

• Contrast indexes weighted by price with those weighted by market capitalisation
• Set out the choices made when building an index
• Explain how indexes are rebalanced and reconstituted
• Explain what security market indexes are used for
• Contrast equity trading on an exchange, off an exchange and over the counter
• Work out average daily volume and float, and explain how liquidity is measured
• Explain the secondary and primary markets for equity and the role each plays

Sources of Equity Returns

• Set out dividends, buybacks, reverse splits as well as ordinary stock splits, and the sequence of dates for a dividend
• Work out an equity's price return and its total return

Introduction to Equity Valuation

• Tell intrinsic value apart from market value
• Explain valuation based on assets and when it is suitable
• Contrast market value with book value and link return on equity to the cost of equity
• Outline the main families of equity valuation model and what each gains or gives up

Discounted Cash Flow (DCF) and Growth Models

• Work out a share's intrinsic value with the dividend discount model
• Set out what the Gordon growth model takes for granted and how sensitive its output is to inputs
• Use a dividend discount model with several growth stages
• Explain why free cash flow to equity can serve as the basis of a valuation
• Contrast what FCFF, FCFE, dividend and residual income models each need as inputs
• Put a value on preferred stock that is neither callable nor convertible

Relative Value Equity Valuation Approaches

• Work out the price-to-earnings ratio and explain what it means
• Work out multiples based on enterprise value and explain what they mean
• Tell apart valuation by comparables and valuation by forecasted fundamentals
• Choose comparable peers and tell trailing multiples apart from forward ones

Financial Statement Forecasting in Equity Valuation

• Explain how a forecast model for a share projects sales, margins, investment and funding
• Value a share by weighting several scenarios by their probabilities

Industry and Competitive Analysis

• Set out ways of assigning companies to industries
• Analyse an industry through the five competitive forces
• Explain the industry life cycle and what follows from each stage
• Analyse the outside forces acting on an industry with the PESTLE framework
• Assess trends in how large an industry is, its growth, its profitability and the market shares within it

Company Analysis: Past, Present, and Future

• Explain how a firm competes and where it stands in its industry
• Assess what drives a firm's revenue, how profitable its operations are and how much pricing power it has
• Assess a firm's working capital, its capital spending and how it is financed

Equity Analyst Research Reports

• Set out what goes into a company research report, including one that initiates coverage
• Contrast research on the sell side with the buy side and explain what activist short sellers do
• Explain how analysts working from one model can still arrive at different values

The Capital Asset Pricing Model, Market Model, and Other Factor-Based Equity Models

• Estimate the return equity holders require with both the market model and the CAPM
• Explain multi-factor models and arbitrage pricing theory as used for equities

Equity Jurisdictions, Classes, and the Voting Process

• Explain how voting and economic rights vary between share classes and between jurisdictions
• Explain how shareholder votes work and what investors, proxy advisers, the board and management each do