NISM Series XII · Unit 1 of 7 · about 5% of the paper
Understanding securities markets and performance: NISM Series XII notes and practice questions
Securities markets move savings of households into the investments of companies and governments. This chapter explains why markets exist, who takes part, and who keeps them honest.
What to know in Unit 1
- Primary versus secondary market.
- Money market versus capital market.
- Roles of SEBI, RBI and other regulators.
Key terms, examples and exam traps
Securities market
The securities market is where securities such as shares, bonds and units are issued and traded, channelling savings into productive investment.
Example. A company raises money by selling shares to the public, and investors later trade those shares.
Exam trap. This statement is false: The securities market deals only in physical goods.
Primary market
The primary market is where new securities are issued for the first time and the issuer receives the money.
Example. A company launches an IPO and receives funds from investors.
Exam trap. This statement is false: Investors trade with each other in the primary market.
Secondary market
The secondary market is where existing securities are bought and sold among investors, usually on a stock exchange, providing liquidity.
Example. An investor sells shares she bought last year to another investor on an exchange.
Exam trap. This statement is false: The issuing company receives the money when shares trade in the secondary market.
Money market
The money market deals in short-term debt instruments with a maturity of up to one year, such as treasury bills and commercial paper.
Example. A company raises funds for 90 days by issuing a short-term instrument.
Exam trap. This statement is false: The money market deals in securities of 10 years or more.
Capital market
The capital market deals in long-term securities such as equity shares and bonds with maturities beyond one year.
Example. A company issues 10-year bonds to fund a new factory.
Exam trap. This statement is false: The capital market deals only in securities of less than one year.
SEBI
The Securities and Exchange Board of India regulates the securities market, protects investors and promotes market development.
Example. A broker that violates trading rules is penalised by the market regulator.
Exam trap. This statement is false: SEBI sets the repo rate.
Market participants
Participants include issuers, investors, brokers, depositories, clearing corporations, merchant bankers, mutual funds and regulators.
Example. An investor buys through a broker, with units held at a depository and trades settled by a clearing corporation.
Exam trap. This statement is false: The only participants in the securities market are investors and issuers.
Financial intermediation
Financial intermediaries connect savers and borrowers and add value through pooling, risk management and information.
Example. A bank takes deposits from savers and lends to borrowers.
Exam trap. This statement is false: Intermediaries add no value to the financial system.
Market efficiency
An efficient market reflects available information in prices quickly, making it hard to consistently earn abnormal returns.
Example. Share prices adjust within seconds of a company announcing results.
Exam trap. This statement is false: In an efficient market prices never move.
Market performance indicators
Indices, market capitalisation, turnover and the number of investors are used to assess how a market is performing.
Example. An analyst reviews the Sensex and daily turnover to judge market activity.
Exam trap. This statement is false: Market performance is measured only by the price of one share.
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 “Market performance indicators”?
- Promoters' minimum contribution of 20% of the post-issue capital is locked in for 18 months after listing, to show their commitment.
- The expense ratio is the annual percentage of a scheme's assets charged for managing it. It is built into the NAV.
- An IPO is the first offer of shares by an unlisted company to the public, after which the company's shares are listed on an exchange.
- Indices, market capitalisation, turnover and the number of investors are used to assess how a market is performing.
Q2. Which term is described here? Participants include issuers, investors, brokers, depositories, clearing corporations, merchant bankers, mutual funds and regulators.
- Warrants
- Draft Red Herring Prospectus (DRHP)
- Financial intermediation
- Market participants
Q3. Which term is described here? An efficient market reflects available information in prices quickly, making it hard to consistently earn abnormal returns.
- Convertible security
- Market efficiency
- Red Herring Prospectus
- Inflation
Q4. Which term is described here? The securities market is where securities such as shares, bonds and units are issued and traded, channelling savings into productive investment.
- Offer for Sale (OFS)
- Merchant banker
- Market order
- Securities market
Q5. Which statement best describes “Primary market”?
- The lot size is the fixed number of units in one derivatives contract, set by the exchange. Trading is in multiples of lots.
- A debenture is a long-term debt instrument issued by a company, which can be secured or unsecured and may be convertible into shares.
- A stockbroker is a SEBI-registered member of an exchange who executes trades for clients and earns brokerage.
- The primary market is where new securities are issued for the first time and the issuer receives the money.
Q6. Which statement about “Money market” is correct?
- The money market deals in short-term debt instruments with a maturity of up to one year, such as treasury bills and commercial paper.
- Commercial paper is a long-term secured bond.
- The registrar fixes the issue price.
- The money market deals in securities of 10 years or more.
Frequently asked questions
How much of NISM Series XII comes from Unit 1?
Unit 1 (Understanding securities markets and performance) usually carries about 5% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series XII Unit 1?
Primary versus secondary market. Money market versus capital market. Roles of SEBI, RBI and other regulators.
Are these NISM Series XII practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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