CFA Level I Equity Investment Tips

Having a solid grasp of the foundational concepts and calculations is essential to excel in the equity investment section of the CFA^® Level I exam. It holds significant importance in the exam, and you should dedicate a few weeks in your study plan for this topic area.

Table of Contents

• Market Organization and Structure

• Security Market Indexes

• Market Efficiency

• Overview of Equity Securities

• Introduction to Industry and Company Analysis

• Equity Evaluation: Concepts and Basic Tools

How To Study For CFA Level I Equity Investments Topic?

It is easy to get bogged down by the calculations in Equity Investments, but as demonstrated in the reading summaries, these only make up a small proportion of the syllabus. You should not expect the majority of Equity Investment questions to include calculations. Instead of trying to memorize each calculation:

1. Focus on the interpretation of the numbers rather than the calculations

2. Practice as many questions as you can using specific CFA Level I sample questions and Level I mock exams

3. Throughout your prep stay organized to keep track of your progress

CFA Level I 6-Month Study Progress Tracker

What is a Learning Outcome Statement (LOS) for the CFA Exam?

Learning Outcome Statements while studying for a CFA exam refer to specific skills and concepts you should possess within an exam topic whereas exam topics describe the broader body of knowledge you should have. For example, the Equity Investment exam topic at Level I has a few LOSs that you’ll need to learn.

An example of a CFA LOS for Equity Investments is “describe the major types of securities, currencies, contracts, commodities, and real assets that trade in organized markets, including their distinguishing characteristics and major subtypes."

Why CFA Candidates Need To Learn Equity Investments

Purchasing stock in companies is one of the largest investment types in most markets, making it crucial as a CFA candidate to understand the characteristics of equity investments, how the markets operate and how to value current or potential equity interests, in order to make suitable investment decisions.

Understanding how to differentiate between risks that impact all companies and those which are company-specific is also crucially important as you develop your CFA skills.

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How Much of the CFA Exam Tests Equity Investments?

The Equity Investments topic represents 11%-14% of the Level I exam, which is approximately 19-25 questions. This topic is tested in the afternoon session, within the Assets Functional Area, alongside Fixed Income, Derivatives, and Alternative Investments.

Is the CFA Level I Equity Investments Topic Hard?

The Equity Investments topic is largely discursive at Level I, so it’s not as technically challenging as some other areas. However, there is a lot of terminology to become comfortable with, and question practice will help a huge amount with this.

The final reading is where most of the numbers lie - so while some candidates find this technically more challenging, remember that from a testing perspective, only a small number of the Equity Investments questions will be asking you to do calculations. Make sure you don’t neglect the earlier readings.

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When Should CFA Level I Candidates Study Equity Investments?

Equity is a standalone topic, so can be studied at any point. Some candidates like to study Equity Investments alongside the other topics it is tested with on exam day:

• Fixed Income

• Derivatives

• Alternative Investments

So they are able to understand the differences (and similarities) between the different assets. Make sure you study Equity Investments after Quantitative Methods as the Time Value of Money techniques will be needed here.

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CFA Level I Equity Investments Topic Readings

Below are overviews of each Level I Equity Investment reading and what you are expected to learn.

Market Organization and Structure

This high-level reading introduces the main types of investment assets:

• Equity securities

• Currencies

• Commodities

There are a lot of definitions throughout the reading but the detail largely will be covered at a greater depth elsewhere in the curriculum. The second half introduces various ways an investor can take a position on an asset such as long versus short and strategies such as short selling and leveraged positions.

There is a short section on market regulation as well as order execution instructions such as market orders and limit orders.

Security Market Indexes

Security market indexes are used to measure the performance of markets and investment managers. This reading introduces you to different ways to weigh indexes and asks you to calculate index values and returns for the different methods.

It’s important to understand why security market indexes are used and the different types which exist in practice.

Market Efficiency

Market efficiency refers to how quickly the price of a security fully and rationally reflects all available information about it. This reading looks at the factors which would affect how efficient a market is, and explains the three theoretical forms of market efficiency.

As always the focus should be on how knowing the level of market efficiency should affect an analyst’s role. There is an interesting section towards the end about anomalies and behavioral finance (such as why investors have a bias) and how this can impact the market.

Overview of Equity Securities

Companies can issue different types of equity securities such as common and preference shares, and this reading focuses on the differences between these, such as:

• Voting rights

• Ownership

• Risk and return

There is one LOS on public versus private equity securities, and one on non-domestic equity securities. An investor earns a return in equity from any dividends and capital gains in the value of the stock itself.

Introduction to Industry and Company Analysis

How do we understand what is happening within an industry? This reading introduces various tools such as understanding what constitutes an ‘industry’, analyzing the stage of the industry life cycle, and using Porter’s five forces to understand factors such as the barriers to entry and the level of competition, as well as discussing how external influences impact the industry such as the government and demographic factors..

Equity Evaluation: Concepts and Basic Tools

This is the only reading within Equity Investments that is focused on calculations. Remember that when you get bogged down in the numbers - the other readings are just as important as this one, although this is likely the most technically challenging.

As well as being able to calculate the value of various equity securities using methods such as discounted cash flow, price multiplied, and asset-based models, it's equally important to understand the advantages and disadvantages of each.

Discounted Cash Flow uses similar Time Value of Money techniques to other areas of the CFA Level I curriculum, where forecasted future cash flows (here that would be future dividends and/or estimated future stock price at the sale date) are discounted back to present value, using the investor’s required return for equity.

If the calculated price is less than the actual trading price of the stock, the stock would be deemed to be overpriced, and vice versa.

Review Equity Investment Concepts with Free Flashcards

Calculator Basics for the CFA Level I Exam

For Equity Investments, it’s the Time Value of Money buttons (N, I/Y etc) on your BAII Plus which will come in most handy, alongside the CF function (which also calculates the present value of cashflows, but allows different cashflows each period unlike the TVoM payment (PMT) button).

CFA Level I Exam Quiz

Answer these five questions to test your readiness for the Level I Exam.

Is the Equity Investments Topic the Same for CFA Level I and Level II?

Equity Investments is a slightly larger topic on the Level II exam than in the Level I exam. The information covered in Level I is assumed knowledge as you move into Level II so it’s well worth the time investment to be comfortable with the fundamentals.

The focus at Level II Equity Investments is on more complex valuation methods - some build upon the calculations covered in the final Level I reading, and a few new methods are also introduced.

Ready To Start Preparing For Equity Investments?

Looking for more guidance on how to prepare for Equity Investments? Enroll in one of our CFA Level I Premium study packages to receive expert instruction, CFA Program study materials, and more. Give yourself the best chance to prepare, practice, and perform on the CFA exam.

Keep Reading For More CFA Level I Topic Overviews

• Quantitative Methods

• Economics

• Corporate Issuers

• Financial Statement Analysis

• Fixed Income

• Derivatives

• Alternative Investments

• Portfolio Management

• Ethical and Professional Standards