NISM Series XXI-A · Unit 3 of 12 · about 10% of the paper
Investing in stocks: NISM Series XXI-A notes and practice questions
How portfolio managers analyse and select equity investments: valuation, style and risk.
What to know in Unit 3
- Fundamental ratios and valuation.
- Growth versus value; large versus small.
- Equity risks.
Key terms, examples and exam traps
Equity share
An equity share represents ownership in a company with a residual claim on profits and assets.
Example. A client owns part of a listed company.
Exam trap. This statement is false: Equity gives a fixed return.
Market capitalisation
Market capitalisation is share price times shares outstanding, used to classify companies as large, mid or small cap.
Example. A company with 10 crore shares at ₹300 is valued at ₹3,000 crore.
Exam trap. This statement is false: Market cap is the company's debt.
Price-to-earnings ratio
P/E is the share price divided by earnings per share, showing how much investors pay per rupee of earnings.
Example. A stock at ₹300 with EPS of ₹15 has a P/E of 20.
Exam trap. This statement is false: P/E is earnings divided by price.
Price-to-book ratio
P/B compares share price with book value per share, widely used for banks and asset-heavy companies.
Example. A bank at ₹300 with book value of ₹150 trades at 2 times.
Exam trap. This statement is false: P/B compares price with dividend.
Return on equity
ROE is net profit divided by shareholders' equity and measures how effectively equity is used.
Example. A company earns ₹20 crore on equity of ₹100 crore.
Exam trap. This statement is false: ROE is price divided by earnings.
Growth investing
Growth investing seeks companies with above-average earnings growth, often at higher valuations.
Example. A manager buys fast-growing firms with premium multiples.
Exam trap. This statement is false: Growth investors buy only stocks with the lowest P/E.
Value investing
Value investing buys stocks trading below estimated intrinsic value, expecting the price to converge.
Example. A manager buys a good business at a low multiple.
Exam trap. This statement is false: Value investors buy only the most expensive stocks.
Quality investing
Quality investing favours companies with high returns on capital, stable earnings and strong governance.
Example. A manager picks businesses with durable returns and low debt.
Exam trap. This statement is false: Quality investing seeks the most indebted firms.
Large, mid and small caps
Large caps are generally more stable and liquid; small caps offer higher growth potential with more volatility and lower liquidity.
Example. A small-cap stock falls sharply on a bad quarter.
Exam trap. This statement is false: Small caps are less volatile than large caps.
Dividend
A dividend is a share of profit paid to shareholders, which forms part of total return along with price change.
Example. A company pays ₹6 per share to holders.
Exam trap. This statement is false: Dividends are guaranteed every year.
Equity risks
Equity investors face market, company-specific, valuation and liquidity risks, and can lose capital.
Example. A stock falls 40% after a profit warning.
Exam trap. This statement is false: Equity cannot lose capital over short periods.
Sector concentration
Concentrating a portfolio in one sector raises risk because sector-specific shocks hit all holdings together.
Example. A portfolio holding mostly banking stocks falls when banks fall.
Exam trap. This statement is false: Sector concentration lowers portfolio risk.
Corporate governance
Good governance, with independent boards and transparent disclosure, reduces the risk of value loss to minority shareholders.
Example. A manager avoids a company with weak disclosure.
Exam trap. This statement is false: Governance does not affect investment risk.
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? Quality investing favours companies with high returns on capital, stable earnings and strong governance.
- Time value of money
- Quality investing
- Leverage risk
- Dividend
Q2. Which statement best describes “Price-to-book ratio”?
- Growth investing seeks companies with above-average earnings growth, often at higher valuations.
- Good governance, with independent boards and transparent disclosure, reduces the risk of value loss to minority shareholders.
- In non-discretionary PMS the manager advises and executes only after the client's prior approval for each decision.
- P/B compares share price with book value per share, widely used for banks and asset-heavy companies.
Q3. Which term is described here? An equity share represents ownership in a company with a residual claim on profits and assets.
- Equity share
- Review and monitoring
- Position sizing
- Capital gains statement
Q4. Which term is described here? ROE is net profit divided by shareholders' equity and measures how effectively equity is used.
- Price-to-earnings ratio
- Capital gains statement
- Mutual fund
- Return on equity
Q5. Which term is described here? Growth investing seeks companies with above-average earnings growth, often at higher valuations.
- Distributor's role
- Contribution of securities
- Growth investing
- Government security
Q6. Which statement best describes “Equity risks”?
- Style drift occurs when a manager moves away from the stated investment approach, which should be monitored.
- Equity investors face market, company-specific, valuation and liquidity risks, and can lose capital.
- A dividend is a share of profit paid to shareholders, which forms part of total return along with price change.
- A depository holds securities in electronic form, enabling transfer by book entry; India has NSDL and CDSL.
Frequently asked questions
How much of NISM Series XXI-A comes from Unit 3?
Unit 3 (Investing in stocks) usually carries about 10% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series XXI-A Unit 3?
Fundamental ratios and valuation. Growth versus value; large versus small. Equity risks.
Are these NISM Series XXI-A practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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