NISM Series - XII Securities Markets Foundation Cert. - Full-Length Test

The Securities and Exchange Board of India (SEBI) is the statutory body established to protect the interests of investors in securities and to promote the development and regulation of the securities market in India. It oversees intermediaries, exchanges, and listed companies.

Unlike the primary market, where new securities are issued, the secondary market facilitates the trading of existing securities. This provides liquidity to investors, allowing them to enter or exit investments without affecting the capital of the issuer.

Price discovery is a core function of the securities market. It occurs when buyers and sellers interact in the exchange to arrive at a consensus price based on demand, supply, and available information about the security.

The International Financial Services Centres Authority (IFSCA) is the unified regulator for the development and regulation of financial products and services within the International Financial Services Centres (IFSC) in India, promoting ease of doing business.

Securities markets act as a channel to transfer funds from savers (investors) to those who need capital for productive purposes (issuers). This efficient allocation of capital is a key driver for economic growth and industrial development.

The secondary market provides marketability to existing securities. By allowing investors to sell their holdings to other investors, it ensures that capital is not “locked in” and remains liquid for the market participants.

Intermediaries like brokers, merchant bankers, and depositories provide the necessary infrastructure and services that connect capital seekers (issuers) with capital providers (investors), making the market operations smooth and regulated.

SEBI’s Innovation Sandbox allows FinTech firms to test their new technologies or business models in a live environment with real data but on a limited set of users to foster innovation while managing risks.

Prices in a liquid secondary market react instantly to news regarding a company’s performance or economic changes. This serves as a signal to investors about the health and future prospects of the issuing entity.

The money market is a segment of the financial market that deals with short-term lending and borrowing, typically for maturities of up to one year, whereas the securities/debt market handles long-term capital.

Equity shares represent the ownership interest in a company. Equity holders are the owners who bear the risk of the business but also enjoy the rewards through dividends and capital appreciation.

Unlike equity, debt instruments like bonds or debentures are loans made by investors to the issuer. They usually come with a commitment to pay regular interest (coupon) and return the principal on a specific date.

The Rule of 72 is a simplified formula to estimate how many years it will take for an investment to double at a given annual fixed interest rate by dividing 72 by the rate.

Fundamental analysis focuses on financial statements, earnings potential, and intrinsic value. The study of historical price and volume patterns to predict future movements is actually called “technical analysis.”

Hybrid instruments combine features of both equity and debt. Convertible debentures start as debt (paying interest) but can be converted into equity shares after a certain period.

Asset allocation involves spreading investments across various classes like equity, debt, and gold to balance risk and reward based on an individual’s goals, risk tolerance, and investment horizon.

Unsystematic risk is unique to a specific company (e.g., a strike) or industry. It can be reduced through diversification. Systematic risk, like interest rate changes, affects the whole market.

In a growth option, the profits made by the scheme are reinvested rather than paid out as dividends. This helps in capital appreciation over the long term through the power of compounding.

Intrinsic value is the “true” or “fair” value of a stock calculated by analyzing a company’s earnings, assets, and growth potential, independent of its current market price.

Technical analysis views price as an aggregate indicator of all information. It focuses on the belief that historical price trends tend to repeat and uses charts to identify buying and selling opportunities.

Diversification can reduce or eliminate Unsystematic Risk (company-specific risk), but it cannot eliminate Systematic Risk (market-wide risk) because those factors affect all securities in the market.

Debt investors are creditors to the company. Their primary return is the regular interest (coupon) paid by the issuer. They do not have voting rights or a claim on residual profits like equity holders.

Also known as par value, the face value is the principal amount stated on the bond certificate which the issuer must repay to the bondholder when the bond reaches maturity.

Before investing, a disciplined investor performs fundamental or technical research to identify suitable stocks. This is followed by trade execution and then ongoing monitoring of the investment’s performance.

Gold and other commodities often hold their value or appreciate when the purchasing power of paper currency declines due to inflation, making them a popular choice for diversifying a portfolio.

Equity shares represent ownership capital. Treasury Bills, Commercial Paper, and Certificates of Deposits are all debt or money market instruments used for borrowing and lending.

The risk-return trade-off is a fundamental principle where investors demand a higher potential return to compensate them for taking on a higher level of uncertainty or risk in an investment.

Zero-coupon bonds do not pay periodic interest. Instead, they are sold at a price lower than their face value (at a discount) and the “interest” is the difference received at maturity.

Real estate is generally illiquid because it takes significant time, legal processing, and effort to find a buyer and complete a sale compared to stocks or mutual funds which can be sold instantly.

The real rate of return is the nominal return minus the inflation rate. If an investment earns 8% but inflation is 6%, the actual increase in purchasing power (real return) is only 2%.

An Initial Public Offer (IPO) is the first time a company offers its shares to the general public to raise capital and get listed on a stock exchange.

In a fixed price issue, the issuer and lead manager set the price beforehand. It is in a “Book Building” issue where the price is discovered based on bids received from investors.

Underwriters agree to subscribe to the securities if the public does not fully subscribe to the issue, thereby ensuring the issuer company raises the required minimum amount of capital.

ASBA is a mechanism where the application money for an IPO is blocked in the investor’s bank account rather than being debited immediately. It is only debited upon successful allotment.

QIBs are institutional investors like mutual funds, insurance companies, and banks who are perceived to have the expertise to evaluate and invest in the capital markets.

A rights issue allows existing shareholders to maintain their proportionate ownership by purchasing additional shares, usually at a discount to the market price, before they are offered to the public.

A prospectus is a legal document that provides potential investors with detailed information about the company’s business, finances, promoters, and the risks involved in the investment.

As per SEBI regulations, if a company does not receive at least 90% of the issued amount as subscription, the issue is considered failed, and the money must be refunded to the applicants.

In a book-built issue, the DRHP contains all details except the price or the number of shares. The final price is determined only after the bidding process is complete.

The RTA is an intermediary that keeps track of the data of all shareholders, processes share transfers, and handles dividend payments for the issuing company.

An FPO is an issuance of shares to the public by a company that is already listed on a stock exchange, usually to raise additional capital or reduce promoter holding.

To encourage participation from small investors, SEBI mandates that a certain portion of a public issue (usually 35% in some cases) be reserved for Retail Individual Investors.

Private placement is the offer of securities to a select group of persons (up to 200 in a financial year) rather than the public at large. It is a faster way to raise capital.

When an issue is oversubscribed, the basis of allotment is finalized in consultation with the stock exchange to ensure a fair distribution of shares among applicants.

One of the primary objectives of an IPO is to have the company’s shares listed on a recognized stock exchange to provide liquidity and a market for the shareholders.

Bankers to the issue are appointed to manage the flow of application money. They collect the forms/funds and update the lead managers on the subscription figures.

In an OFS, existing shareholders (like promoters) sell their shares to the public. The proceeds go to the sellers, not to the company’s bank account.

Companies are required to submit the Draft Red Herring Prospectus (DRHP) to SEBI for review and observations to ensure all necessary disclosures are made for investor protection.

The definition of ‘securities’ has been expanded to include Electronic Gold Receipts (EGRs), which represent gold held in vaults and can be traded on stock exchanges, providing a regulated way to invest in gold.

ZCZP instruments are used by NPOs to raise funds for social projects via the Social Stock Exchange. They do not pay interest (Zero Coupon) and the principal is not returned (Zero Principal), acting effectively as a donation for social impact.

The primary market is where issuers (companies or governments) raise fresh capital by issuing securities directly to investors for the first time. This process facilitates the direct flow of savings into productive investments.

In a demat system, the Depository is the ‘Registered Owner’ on the company’s books, but the actual investor who holds the units and enjoys all rights (like dividends) is the ‘beneficial owner.’

The Regulatory Sandbox provides a controlled environment where FinTech firms can test innovative products or services with real customers under certain regulatory relaxations for a limited period.

Instead of prices being fixed by the government, the securities market allows millions of participants to trade, leading to a consensus on the ‘fair price’ based on supply, demand, and available information.

The Innovation Sandbox is a non-live testing environment where FinTech applicants can use historical, anonymized data provided by Market Infrastructure Institutions (MIIs) to develop and test their solutions before going live.

While the primary market creates the asset, the secondary market allows investors to exit their investments by selling them to other investors, thereby making the securities liquid and marketable.

SEBI has established a Cybersecurity and Cyber Resilience Framework (CSCRF) for Regulated Entities to ensure they have robust systems to protect against cyber threats and maintain market integrity.

By providing specialized infrastructure, legal expertise, and pooling mechanisms, intermediaries like brokers and mutual funds make it cheaper and more efficient for individual investors to participate in the market.

Intrinsic value is the “true” or “actual” worth of a stock derived from its future earnings and financial health. Fundamental analysts compare this to the market price to see if the stock is undervalued or overvalued.

Technical analysts believe that all known information is already reflected in the price. They use charts and indicators to identify trends and patterns that help predict future price movements based on past behavior.

The Riskometer is a pictorial representation of the risk level (Low to Very High) and must be included in the SID, KIM, and all advertisements to help investors understand the potential volatility.

In a growth option, the scheme’s returns are reinvested, leading to an increase in the NAV over time. This is suitable for investors who do not need regular income and want to benefit from compounding.

Support acts as a “floor” for the stock price. When the price drops to this level, more buyers tend to enter, preventing the price from falling further, at least temporarily.

Fundamental analysis is holistic. It examines financial statements (revenue, costs), industry features, and qualitative factors like management’s experience and corporate governance to estimate the company’s future potential.

SWP is the opposite of an SIP. It allows investors (especially retirees) to get a regular cash flow from their mutual fund investments by automatically redeeming a specific number of units or a fixed amount periodically.

Examples include convertible debentures (which start as debt but can become equity) or preference shares (which have a fixed dividend like debt but represent ownership like equity).

This ratio indicates the “churning” in the portfolio. A high ratio might mean higher transaction costs and taxes, which could impact the final returns for the unitholders.

EGRs allow investors to trade and hold gold digitally. This eliminates concerns about physical storage, purity, and theft, as the gold is stored in regulated vaults and the receipts are traded on the stock exchange.

A company must receive at least 90% subscription of the net offer to the public. If it fails, the entire amount collected must be refunded to the investors within 4 days of the issue closing.

Underwriters (like banks or brokers) take the risk of buying the shares if the public does not. This ensures the company successfully raises the required capital, and in return, they receive an underwriting commission.

The Registrar scrutinizes the applications and, in consultation with the Lead Manager and Stock Exchange, decides how shares will be distributed among applicants when demand exceeds supply.

Valid for up to one year, a shelf prospectus saves time and costs for frequent issuers (like NBFCs) by allowing them to raise debt multiple times using the same base document, only filing an “Information Memorandum” for each new tranche.

They are specialized banks appointed to collect application money from investors and provide regular updates on the total collections to the Lead Managers during the issue period.

To maintain the integrity of the price-discovery process, SEBI does not allow QIBs or NIIs to withdraw or reduce their bids once they have been placed, though they can increase their bid price or quantity.

In hard underwriting, the commitment is absolute and is made before the issue opens. This is different from “soft underwriting” where the risk only begins after the issue closes and a shortfall is seen.

Since the full prospectus is hundreds of pages long, the abridged version contains all the essential details (summary) to help the investor make a quick but informed decision.

The issuer must appoint a Debenture Trustee before the issue opens to protect the interests of the debenture holders and ensure the company fulfills its repayment obligations.

Application Supported by Blocked Amount (ASBA) simply “blocks” the funds in the investor’s account. The money is only debited if the shares are allotted; otherwise, the block is removed, ensuring no loss of interest for the investor.

The CC ensures that every buyer gets their shares and every seller gets their money, even if one party defaults. It effectively steps in as the “buyer to every seller” and “seller to every buyer.”

The Request for Quote (RFQ) platform is an electronic system where institutional investors can request quotes and negotiate trades in corporate bonds, bringing transparency to a traditionally opaque market.

A narrow spread indicates a highly liquid market where the cost of transacting is low. A wide spread suggests that it might be difficult or expensive to buy or sell the security quickly.

To ensure that trading is not interrupted by technical failures, fires, or cyberattacks, MIIs must have a secondary site (DRS) that can take over operations immediately to maintain data integrity.

These entities provide the “infrastructure” for the market. They are subject to high regulatory standards and must have various oversight committees (like Risk Management and Technology) to ensure smooth functioning.

Block deals are large transactions between two parties that are executed in a special 15-minute window to ensure they don’t cause sudden, massive price swings in the normal retail market.

Unlike individual “circuit filters” for stocks, circuit breakers apply to the whole market (e.g., Sensex or Nifty). They give the market a “cooling-off period” to prevent panic during extreme volatility.

Settlement risk is the danger that you pay for shares but don’t receive them, or you sell shares but don’t get the money. Modern clearing corporations eliminate this risk by acting as the central counterparty.

Institutions have their trades cleared and settled by a specialized ‘Custodian’ (usually a bank) rather than their stockbroker. The CP code helps the exchange identify which custodian is responsible for that specific trade.

SIFs are a new category of sophisticated mutual funds. Because they use complex strategies, they require a higher minimum investment of Rs.10 lakhs to ensure only informed or wealthy investors participate.

SEBI mandates strict timelines for investor service. Once the New Fund Offer (NFO) period ends, the AMC must finalize the allotment and credit the units to the investors’ accounts within 5 working days.

SEBI is the statutory regulator. AMFI is an industry body (Self-Regulatory Organization) that recommends best practices and sets the code of conduct for AMCs and distributors.

In active funds, the manager uses research and analysis to select specific securities they believe will outperform the market. This is the opposite of “passive investing” (index funds/ETFs).

SEBI has set these strict deadlines to protect investor liquidity. Failure to meet these timelines can lead to the AMC having to pay interest to the investor for the delay.

Since an SIP involves a fixed investment amount, it automatically buys more units during market dips. Over time, this lowers the average cost per unit for the investor, making the investment less sensitive to market timing.

The Investor Charter is a document issued by SEBI that details the services provided by mutual funds, the rights of investors, and the timelines for grievance redressal.

Liquid funds are used for parking surplus cash for very short periods. They are considered low-risk as they invest in highquality debt instruments that mature in less than 3 months.