NISM Series XII · Unit 4 of 7 · about 20% of the paper
Secondary markets: NISM Series XII notes and practice questions
Where shares trade every day. This chapter covers exchanges, brokers, orders, indices, settlement, the depository system and the safeguards that protect the market.
What to know in Unit 4
- Stock exchanges, trading hours and settlement.
- Order types and price bands.
- Depositories and demat.
- Indices and circuit breakers.
Key terms, examples and exam traps
Stock exchange
A stock exchange is a regulated marketplace where securities are listed and traded, such as the BSE and the NSE.
Example. Buyers and sellers trade listed shares on a regulated electronic platform.
Exam trap. This statement is false: A stock exchange sets the company's profit.
Trading hours
Equity trading on Indian exchanges runs from 9:15 am to 3:30 pm on business days, with a pre-open session from 9:00 am to 9:15 am.
Example. An investor places an order at 9:20 am during the regular session.
Exam trap. This statement is false: Equity markets trade 24 hours a day.
Settlement cycle
Equity trades are settled on a T+1 basis, which means securities and funds are exchanged one working day after the trade.
Example. A share bought on Monday is delivered to the buyer's account on Tuesday.
Exam trap. This statement is false: Equity trades settle on T+5.
Stockbroker
A stockbroker is a SEBI-registered member of an exchange who executes trades for clients and earns brokerage.
Example. An investor places her order through a registered intermediary who is an exchange member.
Exam trap. This statement is false: Investors can trade directly on the exchange without a member.
Demat account
A demat account holds securities in electronic form and is opened with a depository participant.
Example. An investor holds her shares electronically rather than as paper certificates.
Exam trap. This statement is false: A demat account holds only physical share certificates.
Depository
A depository holds securities in electronic form and enables transfer of ownership through book entries. India has two: NSDL and CDSL.
Example. A institution keeps electronic records of who owns which shares.
Exam trap. This statement is false: India has five depositories.
Depository participant (DP)
A DP is an agent of the depository, such as a bank or broker, through which investors open demat accounts and deal with the depository.
Example. An investor opens a demat account through her bank, which acts as the link to the depository.
Exam trap. This statement is false: A DP is the stock exchange itself.
Clearing corporation
A clearing corporation acts as the counterparty to every trade, guarantees settlement and manages risk, ensuring that trades are completed.
Example. The entity that guarantees that both sides of a trade will be honoured settles the trade.
Exam trap. This statement is false: A clearing corporation sets share prices.
Market order
A market order is an instruction to buy or sell immediately at the best available price in the market.
Example. An investor wants to buy at once and accepts the prevailing price.
Exam trap. This statement is false: A market order fixes the price in advance.
Limit order
A limit order is an instruction to buy or sell at a specified price or better; it may not be executed if the market does not reach that price.
Example. An investor will buy only at ₹100 or lower.
Exam trap. This statement is false: A limit order is always executed immediately.
Stop-loss order
A stop-loss order becomes active when the price reaches a trigger level and is used to limit losses on a position.
Example. A holder places an order to sell if the price falls to ₹90.
Exam trap. This statement is false: A stop-loss order guarantees profit.
Circuit filter
A circuit filter is a price band that limits how much a stock's price can move in a day, to curb excessive volatility.
Example. A stock cannot rise more than 10% in a day because of its price band.
Exam trap. This statement is false: Circuit filters stop trading for the whole year.
Index circuit breaker
Index-based circuit breakers halt trading across the market when the index moves by 10%, 15% or 20% within a day.
Example. The market is halted when the benchmark index falls 10%.
Exam trap. This statement is false: Index circuit breakers apply only to single stocks.
Sensex
The Sensex is the benchmark index of the BSE, comprising 30 large and actively traded stocks, calculated on a free-float market-cap basis.
Example. An index of 30 leading companies on the Bombay exchange.
Exam trap. This statement is false: The Sensex has 50 stocks.
Nifty 50
The Nifty 50 is the benchmark index of the NSE, made of 50 large companies and calculated on a free-float market-cap basis.
Example. An index of 50 leading companies on the National exchange.
Exam trap. This statement is false: The Nifty 50 tracks the debt market.
Free-float market capitalisation
Free-float market cap counts only the shares available for public trading, excluding promoter and locked-in holdings.
Example. An index weights a company by shares that the public can actually trade.
Exam trap. This statement is false: Free-float market cap includes all shares, including promoters'.
Bid and ask
The bid is the highest price a buyer is willing to pay, and the ask is the lowest price a seller will accept; the gap is the spread.
Example. A stock shows buyers at ₹99.90 and sellers at ₹100.10.
Exam trap. This statement is false: The bid is always higher than the ask.
Liquidity in markets
A liquid market allows securities to be bought and sold quickly with little effect on price, shown by tight spreads and high volumes.
Example. A heavily traded stock can be sold in seconds at a small spread.
Exam trap. This statement is false: A liquid stock is hard to sell.
Short selling
Short selling means selling a security you do not own, planning to buy it back later at a lower price; deliveries are managed through securities lending and borrowing.
Example. A trader sells first, expecting the price to fall, and buys back later.
Exam trap. This statement is false: Short selling profits when the price rises.
Securities Transaction Tax
STT is a tax levied on transactions in listed securities on the exchange, such as on the value of delivery-based sale and purchase.
Example. A small tax is charged on each trade executed on the exchange.
Exam trap. This statement is false: STT is a tax on listing a company.
Margin trading
Margin trading means buying securities with borrowed funds, with the investor putting up only a part of the value as margin.
Example. An investor buys shares worth ₹1 lakh by depositing ₹25,000 and borrowing the rest.
Exam trap. This statement is false: Margin trading removes risk of loss.
Investor Protection Fund
Exchanges maintain funds to compensate investors in case of defaults by members, within limits set by the regulator.
Example. An investor is compensated from an exchange fund when a broker defaults.
Exam trap. This statement is false: The fund guarantees profit on trades.
Surveillance
Exchanges monitor trading to detect price manipulation, insider trading and unusual activity, and use measures like surveillance frameworks.
Example. An exchange flags a stock whose price rises abnormally on low volumes.
Exam trap. This statement is false: Exchanges do not monitor trades.
Insider trading
Insider trading is dealing in securities based on unpublished price-sensitive information, and it is prohibited by SEBI.
Example. A director sells shares just before bad results are announced publicly.
Exam trap. This statement is false: Insider trading is legal if profits are small.
Call auction
In a call auction, orders are collected over a time window and matched at a single price, as in the pre-open session.
Example. Orders gather between 9:00 and 9:08 am and the opening price is discovered together.
Exam trap. This statement is false: A call auction matches each order continuously one by one.
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 term is described here? A demat account holds securities in electronic form and is opened with a depository participant.
- Free-float market capitalisation
- Ponzi scheme
- Stockbroker
- Demat account
Q2. Which statement best describes “Insider trading”?
- Commercial paper is an unsecured, short-term money-market instrument issued by companies at a discount to meet working-capital needs.
- A mutual fund pools money from many investors and invests it in securities through professional managers, and each investor owns units in proportion.
- Insider trading is dealing in securities based on unpublished price-sensitive information, and it is prohibited by SEBI.
- The primary market is where new securities are issued for the first time and the issuer receives the money.
Q3. Which term is described here? A clearing corporation acts as the counterparty to every trade, guarantees settlement and manages risk, ensuring that trades are completed.
- Growth and IDCW options
- Merchant banker
- Clearing corporation
- Exit load
Q4. Which term is described here? Equity trades are settled on a T+1 basis, which means securities and funds are exchanged one working day after the trade.
- Registered intermediary
- Settlement cycle
- Hybrid fund
- Margin trading
Q5. Which term is described here? Index-based circuit breakers halt trading across the market when the index moves by 10%, 15% or 20% within a day.
- Index circuit breaker
- Past performance
- Diversification
- Offer for Sale (OFS)
Q6. Which term is described here? A limit order is an instruction to buy or sell at a specified price or better; it may not be executed if the market does not reach that price.
- Market performance indicators
- Limit order
- Credit rating
- Convertible security
Frequently asked questions
How much of NISM Series XII comes from Unit 4?
Unit 4 (Secondary markets) usually carries about 20% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series XII Unit 4?
Stock exchanges, trading hours and settlement. Order types and price bands. Depositories and demat. Indices and circuit breakers.
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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