NISM Series XI · Unit 6 of 9 · about 20% of the paper
Trading and risk management: NISM Series XI notes and practice questions
The largest unit: orders, margins and how brokers control risk. The details of margins and surveillance frequently appear.
What to know in Unit 6
- Order types and validity.
- Price bands and circuit filters.
- Margins and exposure limits.
- Short selling, BTST, T2T.
Key terms, examples and exam traps
Market order
A market order executes at once at the best available price and offers no control over the price.
Example. A client wants to buy right away.
Exam trap. This statement is false: A market order specifies the price in advance.
Limit order
A limit order is executed only at the specified price or better.
Example. A buyer states a maximum price of ₹100.
Exam trap. This statement is false: A limit order is always executed.
Stop-loss order
A stop-loss order is triggered when price hits a specified level and is meant to limit losses.
Example. An order to sell if the price falls to ₹90.
Exam trap. This statement is false: A stop-loss order ensures a profit.
Immediate or cancel
An IOC order is executed immediately in full or part, and any unfilled portion is cancelled.
Example. An order fills partly at once and the rest is cancelled.
Exam trap. This statement is false: An IOC order stays open all day.
Order validity
Orders can be day orders, valid until the end of the trading day, or have other validity depending on the platform.
Example. An order lapses if not executed by the close.
Exam trap. This statement is false: All orders remain active for a year.
After-market order
An AMO is placed after market hours to be processed at the next day's open.
Example. A client places an order at night for the next morning.
Exam trap. This statement is false: An AMO is executed immediately at night.
Price band
A price band is the maximum percentage a stock can move in a day; orders outside the band are rejected.
Example. A stock with a 5% band cannot rise 8% in a day.
Exam trap. This statement is false: A price band is the minimum trade size.
Index circuit breaker
Market-wide circuit breakers pause trading when the benchmark index falls or rises by 10%, 15% or 20%.
Example. Trading halts when the index drops 10%.
Exam trap. This statement is false: Circuit breakers apply to a single client.
VaR margin
VaR margin is collected to cover the potential loss in a stock over a short period at a given confidence level.
Example. A margin that estimates the likely one-day loss.
Exam trap. This statement is false: VaR margin is a brokerage charge.
Extreme loss margin
ELM is an additional margin to cover losses beyond those estimated by VaR in extreme moves.
Example. A buffer on top of the main margin.
Exam trap. This statement is false: ELM replaces VaR margin.
Mark-to-market margin
MTM margin covers notional losses on open positions based on current prices and is collected from the client.
Example. A client whose position has fallen pays extra margin.
Exam trap. This statement is false: MTM margin is collected only on profit.
Peak margin
Peak margin requires the client to maintain margin for the highest intraday exposure, not just end-of-day.
Example. A client must hold margin for the biggest position taken in the day.
Exam trap. This statement is false: Margin is calculated only at the close.
Exposure limit
Brokers set exposure limits for each client based on margin and risk, to control the risk of default.
Example. A client cannot take positions beyond her limit.
Exam trap. This statement is false: Exposure limits are the same for all clients.
Margin shortfall penalty
A shortfall in required margin attracts penalties from the exchange, which the broker may pass on to the client.
Example. A client fails to maintain margin and is charged.
Exam trap. This statement is false: There is no penalty for a margin shortfall.
Trade-for-trade segment
In the trade-for-trade segment, each trade must be settled by delivery, and intraday squaring off is not allowed.
Example. A stock under restriction must be taken in delivery.
Exam trap. This statement is false: In T2T, positions can be netted off in the day.
Additional surveillance measure
ASM places stocks under additional margins and restrictions when there is a surge in price or volume that is unusual.
Example. An exchange flags a stock after an abnormal rise.
Exam trap. This statement is false: ASM is a measure to reward high volume.
Short selling
Short selling means selling shares one does not own, with the obligation to deliver later; naked short selling is not allowed for delivery settlement.
Example. An investor sells today expecting to buy back cheaper.
Exam trap. This statement is false: Short selling profits when prices rise.
BTST
Buy Today Sell Tomorrow lets a client sell shares the next day before they are received in demat, with associated risks of auction.
Example. A client buys today and sells tomorrow before delivery.
Exam trap. This statement is false: BTST means the client must hold the shares for a month.
Intraday trading
Intraday trades are squared off within the same day, so no delivery is taken, and profits or losses are settled in cash.
Example. A client buys and sells within the day.
Exam trap. This statement is false: Intraday trades always lead to delivery.
Collateral and pledge
Clients pledge securities to the broker as margin through the depository, with the securities remaining in the client's demat account.
Example. A client pledges shares to get margin credit.
Exam trap. This statement is false: Pledged shares are transferred to the broker's name.
Client-level risk monitoring
Brokers monitor client positions in real time and may square off positions when margin falls below required levels.
Example. A broker closes a client's position when margin runs out.
Exam trap. This statement is false: A broker cannot act without the client's call.
Error trade handling
Erroneous trades should be identified and handled as per exchange rules, with documentation and client communication.
Example. A trade placed at a wrong price is reviewed and corrected.
Exam trap. This statement is false: Brokers may ignore errors that favour them.
Price discovery
Price discovery is the process by which buy and sell orders interact to set the market price.
Example. The price changes as buyers and sellers place orders.
Exam trap. This statement is false: The exchange sets prices by decree.
Auction
If a seller fails to deliver shares, an auction is conducted to buy the shares for the buyer, and the seller bears the loss.
Example. A short delivery leads to an auction.
Exam trap. This statement is false: An auction happens when the buyer fails to pay.
Circular trading and risk
Brokers must monitor trading patterns for circular trades and other manipulative activity and report to the exchange.
Example. A broker flags matched trades between related accounts.
Exam trap. This statement is false: Circular trading need not be reported.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which statement best describes “Order validity”?
- Close-out is the compulsory settlement of a position that cannot be delivered, at a price determined by the exchange.
- Segments include normal, trade-for-trade and surveillance-restricted ones, each with different conditions on trading.
- Retail and certain other investors apply through UPI, where the money is blocked in the investor's account until allotment.
- Orders can be day orders, valid until the end of the trading day, or have other validity depending on the platform.
Q2. Which statement best describes “Limit order”?
- Churning is excessive trading in a client's account to generate brokerage rather than serving the client's needs.
- A limit order is executed only at the specified price or better.
- A Qualified Institutions Placement lets a listed company issue shares only to QIBs without a full public offering.
- Brokers monitor client positions in real time and may square off positions when margin falls below required levels.
Q3. Which statement best describes “Market order”?
- QIBs are institutions such as mutual funds, insurers, banks and FPIs, treated as sophisticated investors.
- A retail individual investor applies for shares worth up to ₹2 lakh in an issue.
- ASM places stocks under additional margins and restrictions when there is a surge in price or volume that is unusual.
- A market order executes at once at the best available price and offers no control over the price.
Q4. Which term is described here? An IOC order is executed immediately in full or part, and any unfilled portion is cancelled.
- Rolling settlement
- Draft offer document
- Immediate or cancel
- VaR margin
Q5. Which statement best describes “Stop-loss order”?
- The pre-open session uses a call auction between 9:00 and 9:15 am to determine opening prices.
- A stop-loss order is triggered when price hits a specified level and is meant to limit losses.
- This law provides the legal framework for depositories and dematerialisation of securities in India.
- Settlement of trades around corporate actions follows the ex-date, with the buyer entitled only if bought before the ex-date.
Q6. Which term is described here? Brokers set exposure limits for each client based on margin and risk, to control the risk of default.
- Retail individual investor
- Unauthorised trading
- Exposure limit
- Limit order
Frequently asked questions
How much of NISM Series XI comes from Unit 6?
Unit 6 (Trading and risk management) usually carries about 20% of the questions. The whole exam has 100 questions and the pass mark is 50%.
What should I study in NISM Series XI Unit 6?
Order types and validity. Price bands and circuit filters. Margins and exposure limits. Short selling, BTST, T2T.
Are these NISM Series XI practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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