Stock Market

Stock Market Essay Questions

Question 1. What are Securities markets? Write the features of Securities markets.
Answer: Securities markets are markets in financial assets or instruments and these are represented as I.O.Us (I owe you) in financial form. These are issued by business organizations, corporate units, and the Governments, Central or State. Public sector undertakings also issue these securities. These securities are used to finance their investment and current expenditures. These are thus sources of funds for the issues.

Features Of Securities Markets:

These are thus sources of funds to the issuers. Features of Securities Markets:

1. Liquidity: Security markets offer varying degrees of liquidity, indicating how easily an asset can be bought or sold without significantly affecting its price. Highly liquid markets have many participants and tight bid-ask spreads, making it easier to execute trades quickly.

2. Price Discovery: Security markets provide a mechanism for determining the fair market price of assets. Prices are determined by the interactions of buyers and sellers based on supply and demand dynamics, as well as other market-related information.

3. Transparency: Modern security markets emphasize transparency by providing real-time pricing information, trading volumes, and other relevant data to market participants. This transparency ensures that investors have access to the information needed to make informed decisions.

4. Efficiency: Efficient markets quickly and accurately reflect all available information in asset prices. Efficient markets react rapidly to new information, making it difficult for participants to consistently outperform the market through trading strategies that rely solely on public information.

5. Market Participants: Security markets include a diverse array of participants, including individual investors, institutional investors (such as mutual funds and pension funds), traders, market makers, and speculators. Each participant type has distinct objectives and strategies.

6. Regulation: Security markets are often subject to government regulations and oversight to ensure fair practices, prevent fraud, and maintain market integrity. Regulatory bodies enforce rules that govern market operations, disclosure, and investor protection.

7. Market Segmentation: Security markets can be categorized based on factors like asset type, location (domestic or international), and trading platform (exchange-traded markets or over-the-counter markets). This segmentation allows investors to access markets that align with their investment preferences.

8. Risk and Return: Security markets are inherently tied to the concept of risk and return. Different types of securities offer varying levels of risk and potential returns, influencing investor decisions based on their risk tolerance and investment goals.

Question 2. What is a Capital Market? Describe the different types of Capital Markets.
Answer: A Capital Market may be defined as a market dealing in medium and long-term funds. It is an institutional arrangement for borrowing medium and long-term funds and provides facilities for marketing and trading of securities.

• So it constitutes all long-term borrowings from banks and financial institutions, borrowings from foreign markets, and raising of capital by issuing various securities such as shares debentures, bonds, etc.
• The market where securities are traded is known as the Securities market. It consists of two different segments namely primary and secondary market. The primary market deals with new or fresh issues of securities and is, therefore, also known as a new issue market; whereas the secondary market provides a place for the purchase and sale of existing securities and is often termed a stock market or stock exchange.

Types of Capital Market

1. Primary Market: The primary market is also known as the new issue market. In this market, securities are sold for the first time i.e. new securities are issued from the company. Primary market companies go directly to investors and utilize these funds for investment in buildings, plants machinery, etc.

• The primary market does not include finance in the form of loans from financial institutions because when the loan is issued from financial institutions it implies converting private capital into public capital and this process is called going public.
• The common securities issued in the primary market are equity shares, debentures, bonds, preference shares, and other innovative securities.

2. Secondary Market (Stock Exchange): The secondary market is the market for the sale and purchase of previously issued or second-hand securities. In the secondary market, securities are not directly issued by the company to investors. The securities are sold by existing investors to other investors.

• In the secondary market companies get additional capital as securities are bought and sold between investors only so directly there is no capital formation but the secondary market indirectly contributes to capital formation by providing liquidity to the securities of the company.

Question 3. Explain the role (OR) Significance of the Capital Market in economic development.
Answer: The capital market has a crucial significance to capital formation. Adequate capital formation is indispensable for speedy economic development.

• The main function of the capital market is the collection of savings and their distribution for industrial development. This stimulates capital formation and hence, accelerates the process of economic development.
• A sound and efficient capital market facilitates the process of capital formation and thus contributes to economic development. The significance of the capital market in economic development is explained below.

1. Mobilisation of Savings: The capital market is an organized institutional network of financial organizations, which not only mobilizes savings through various instruments but also channelizes them into productive avenues. By making available various types of financial assets, the capital market encourages savings.

• By providing liquidity to these financial assets through the secondary markets capital market can mobilize large amounts of savings from various sections of the people such as individuals, families, and associations.
• Thus, the capital market mobilizes these savings and makes the same available for meeting the large capital needs of industry, trade, and business.

2. Channelization of Funds into Investments: The capital market plays a crucial role in economic development by channelizing funds by development priorities. The financial intermediaries in the capital market are better placed than individuals to channel the funds into investments that are more favorable for economic development.

3. Industrial Development: The capital market contributes to industrial development in the following ways:

• It provides adequate, cheap, and diversified finance to the industrial sector for various purposes.
• It provides funds for diversified purposes such as expansion, modernization, upgradation of technology, establishment of new units, etc.
• It provides a variety of services to entrepreneurs such as provision of underwriting facilities, participating in equity capital, credit rating, consultancy services, etc. This helps to stimulate industrial entrepreneurship.

4. Modernization and Rehabilitation of Industries: The capital market can contribute towards modernization, rationalization, and rehabilitation of industries. For example, the setting up of development financial institutions in India such as IFCI, ICICI, IDBI, and so on has helped the existing industries in the country to adopt modernization and replacement of obsolete machinery by providing adequate finance.

5. Technical Assistance: An important bottleneck faced by entrepreneurs in developing countries is technical assistance. By offering advisory services relating to the preparation of feasibility reports, identifying growth potential, and training entrepreneurs in project management, the financial intermediaries in the capital market play an important role in stimulating industrial entrepreneurship. This helps to stimulate industrial investment and thus promotes economic development.

6. Encourage Investors to Invest in Industrial Securities: Secondary markets in securities encourage investors to invest in industrial securities by making them liquid. It provides facilities for continuous, regular, and ready buying and selling of securities. Thus, industries can raise substantial amounts of funds from various segments of the economy.

7. Reliable Guide to Performance: The capital market serves as a reliable guide to the performance and financial position of corporations, and thereby promotes efficiency. It values companies accurately and toes up manager compensation to stock values. This gives incentives to managers to maximize the value of companies. This stimulates efficient resource allocation and growth.

Question 4. Define Primary Market. Write its features and functions.
Answer:  The primary market is a segment of the capital market’ where entities such as companies, governments, and other institutions obtain funds through the sale of debt and equity-based securities.

• When a company decides to go public for the first time by raising an Initial Public Offering (IPO), it is done in the primary market. Since the securities are sold for the first time here, a primary market is also known as the New Issue Market (NIM).

Features of Primary Market:

1. It is a new source of procuring long-term capital.
2. Securities are brought for the first time in the market.
3. Also termed as the New Issue Market (NIM).
4. The investors directly deal with new securities.
5. Investors are issued the security certificates after the trading takes place.
6. Securities are issued by the new companies or the existing ones looking for their expansion.
7. The economy experiences capital formation.
8. Fixed assets are purchased from the procured funds in this market.
9. Those loans from financial institutions that are of a long-term nature are not considered in this market.
10. Under this, the private capital is converted into public capital.

Functions of the primary market:

Some of the main functions of the primary market are:

1. New issue offer: The primary market facilitates a new issue offer that has not previously been traded on any stock exchange. So it is called a new issue market. However, a new issue offer is not an easy task. It involves a complete evaluation of a project’s feasibility.

• For instance, financial arrangements must include liquidity ratio, debt-equity ratio, promoters equity, and foreign exchange demand.

2. Underwriting services: Underwriting is critical for a company which is launching a new issue offer where the underwriter must purchase all unsold shares if the company cannot sell the requisite shares to the public.

• Many financial institutions play the role of underwriters and earn commissions. Investors fall back on underwriters to determine if taking up the risk is worth the return. Sometimes underwriters buy the entire IPO issue and then sell it to the investors.

3. Distribution of New Issue: The primary market has another vital function. The distribution process is initiated through a new prospectus issue. Moreover, the general public is invited to purchase the new issue, and thorough information is given about the company, the issue, and the underwriters.

Question 5. Explain the advantages and disadvantages of the Primary Market.
Answer: The primary market is the place where securities are created. Companies float (in finance lingo) new stocks and bonds in this market for the first time.

Advantages of Primary Market:

A few of the major advantages of the primary market are as follows:

1. Raising of Funds: A company can easily raise funds from this segment of the market. The new issues are most of the time capable of raising funds from the dull market if they are priced adequately. Investment in the equity component leads to the economic development of the nation.

2. Safety: There is not much manipulation of the prices. So investing in the primary market is considered a safe option.

3. Attractive Scheme: No taxes like service tax, securities transaction tax, and stamp duty are leviable in the primary market, thereby making it attractive.

4. Opportunity for Existing and New Companies: A company can either set up a new business or diversify the existing one. Both companies have the opportunity to raise funds from the market by new issues. Voluntary investors transfer their savings to the companies that need the funds.

5. Long-Term Requirements: The long-term requirements of the companies are satisfied by raising money from prospective investors.

6. Good Returns: Apart from the routine investment opportunities, the investors are provided with new options with better returns in terms of dividends and long-term appreciation.

7. Attracting Small Investors: It does not necessarily require big corporate investors. The savings of the small investors can be mobilized.

8. Setting up New Business: Those entities who are the new entrants also find the primary market quite attractive to raise funds and satisfy their requirements.

Disadvantages of the Primary Market:

The following are the disadvantages of the primary market:

1. Slackness in the Economy: The general depression in the market in the late nineties did not encourage fresh issues much. The main reason behind the economic slowdown was the poor performance of the industry. Investors feel reluctant if there is a poor response in the economy.

2. Reduced Fund Requirement: The reduction in demand for funds by the industries also hampers the confidence of the investors. A substantial reduction is noticed in the number of IPOs that are being offered to the public. As a result, the public has already made its own alternatives.

3. Sluggish Capital Market: Whenever the market faces depression, the growth of the market is likely to be affected. This also influences the poor response of the investors towards primary market investments.

4. Private Placement: Reduction in the issue cost and other allied costs took the company towards offering the shares by way of private placement. The majority of the time, the investors were unaware of any new issue coming and that led to ignorance in this type of market.

5. Re-Structuring of Business: Cases of amalgamations and mergers were constantly reported as a result of globalization that took place in the nineties. That further boosted the concept of re-structuring among the corporates and they began to reorganize their businesses.

Question 6. Elucidate the Intermediaries in the New Issue Market/ Primary Market.
Answer: Several intermediaries carry out activities of different natures in the new issue market. The intermediaries include:

1. Merchant Bankers/Lead Managers: The intermediaries in the stock market who are responsible for public issues management are known as ‘merchant bankers’ or lead managers.

Merchant bankers require compulsory registration with the SEBI to carry out their activities. Previously there were four categories of merchant bankers, depending on their activities. Now, since Dec. 1997, there is only one category of registered merchant banker and they perform all activities.

2. Underwriter: A set all institutions and agencies that provide a commitment to take up the issue of securities in the event of a failure of the issue to get full subscription from the public, are known as ‘underwriters’.

• They are compensated for their services by payment of commission as agreed upon between the issuing company and the underwriters and subject to the ceiling under the Companies Act. Brokers, Investment companies, Commercial Banks, and term lending institutions provide underwriting services.
• To act as an underwriter, a certificate of registration must be obtained from SEBI. On application, registration is granted to eligible body corporations with adequate infrastructure to support the business and with a net worth of not less than Rs. 20 lakhs.

3. Bankers to an Issue: Bankers who are engaged in the function of acceptance of applications for shares and debentures along with application money from investors in respect of the issue of securities and also a refund of application money to the applicants to whom securities could not be allotted, are called ‘bankers to an issue’. They play an important role in the working of the primary market.

• To carry on the activity as a banker, a person must obtain a certificate of registration from the SEBI. The applicant should be a scheduled bank. Every banker to an issue had to pay the SEBI annually! free for Rs. 5 lakh and a renewal fee of Rs. 2.5 lakh every three years from the fourth year from the date of initial registration. Nonpayment of the prescribed fee may lead to the suspension of the registration certificate.

4. Brokers to an Issue: Intermediaries that are responsible for procuring the subscription to the issue from the prospective investors are called ‘brokers to the issue’. They provide a vital connecting link between the prospective investors and the issuer. They assist in the speedy subscription of issues by the public. Appointment of brokers is however not compulsory.

• The brokerage applicable to all types of public issues of industrial securities is fixed at 1.5%, whether the issue is underwritten or not. The. listed companies are allowed to pay a brokerage on private placement of capital at a maximum rate of 0.5%.

5. Registrars to an Issue and Share Transfer Agents: Registrar and transfer agent are the two categories of intermediaries who actively participate in the new issue activity of a company.

• The Registrar performs the functions of collecting applications from prospective investors, keeping a record of the applications and money received from the investors, assisting the issuing company in the determination of the basis of allotment of securities, processing, and dispatching of allotment letters and refund orders, share and debenture certificates and other documents related to the issue and acting as Depository Participants (DPs).
• Transfer Agent, on the other hand, carries out the activities, such as maintaining the records of holders of securities of the company for and on behalf of the company, handling all matters relating to the transfer and redemption of securities of the company, and acting as Depository Participants (DPs).

6. Debenture Trustees: Trustees who are appointed to safeguard the interests of debenture holders are called ‘debenture trustees’. They are to be appointed before the issue of debentures by a company. No person can act as a debenture trustee unless a certificate of registration has been obtained from SEBI for the purpose.

7. Portfolio Managers: Portfolio managers are defined as persons who in pursuance of a contract with clients, advise, direct, and undertake on their behalf the management/ administration of a portfolio of securities/ funds of clients. The term portfolio means the total securities belonging to any person. Portfolio management can be

• Non-discretionary. The first type of portfolio management permits the exercise of discretion regarding the investment/management of the portfolio of securities/funds.
• To carry on portfolio services, a certificate of registration from SEBI is mandatory. The certificate of registration for portfolio management services is granted to eligible applicants on payment of Rs.5 lakh as a registration fee. Renewal may be granted by SEBI on payment of Rs. 2.5 lakh as renewal fee (every three years).

Question 7. Explain the Role of Primary Market.
Answer: The primary market is also known as the new issues market. It deals with new securities being issued for the first time.

• The essential function of a primary market is to facilitate the transfer of investible funds from savers to entrepreneurs seeking to establish new enterprises or to expand existing ones through the issue of securities for the first time.
• The investors in this market are banks, financial institutions, insurance companies, mutual funds, and individuals.
• A company can raise capital through the primary market in the form of equity shares, preference shares, debentures, loans, and deposits. Funds raised may be for setting up new projects, expansion, diversification, modernization of existing projects, mergers and takeovers, etc.

Role of Primary Markets:

• The key function of the primary market is to facilitate capital growth by enabling individuals to convert savings into investments.
• It facilitates companies to issue new stocks to raise money directly from households for business expansion or to meet financial obligations, it provides a channel for the government to raise funds from the public to finance public sector projects.
• Unlike the secondary market, such as the stock market which trades listed shares between buyers and sellers, the primary market exists for the issuance of new securities by corporations and the government directly to investors.

1. Pricing of securities: The primary market determines the price of the security being issued, which is typically based on the company’s financials, its business model, market conditions, and investor sentiment.

2. Safety of transactions: As transactions in the primary market are overseen by regulatory bodies like SEBI, it ensures the safety and transparency of the transactions.

3. Helps in economic development: The primary market indirectly contributes to the country’s economic development by enabling companies to raise capital for their business operations.

4. Assists in direct investment: The primary market provides an avenue for investors to invest in the securities of a company directly. This allows them to participate in the company’s growth and potentially share in its profits,

5. Price discovery: The primary market helps to establish the fair market value of newly issued securities by setting the initial price through the IPO or other mechanisms. This process helps to ensure that investors are paying a fair price for the securities they are buying.

6. Facilitating the transfer of risk: In the primary market, the risk is transferred from the company to the investors who purchase the newly issued securities. This allows companies to reduce their financial risk. Additionally, it allows them to transfer it to investors who are willing to take on that risk in exchange for the potential for higher returns.

7. Providing investment opportunities: The new issue market offers a range of investment opportunities to investors, including equity shares, bonds, and other debt instruments. These securities can be purchased by individuals, institutional investors, and other market participants who are looking to diversify their portfolios and achieve their investment objectives.

8. Regulating securities issuances: The new issue market is regulated by government bodies such as the Securities and Exchange Board of India (SEBI) in India and the Securities and Exchange Commission (SEC) in the United States.

• These regulatory bodies are responsible for ensuring that issuances are conducted in a fair, transparent, and efficient manner. Also, the investors are protected from fraud and other abuses.

Question 8. Explain in detail the methods of floating new issues in the primary market.
Answer: The New Issue Market or primary market deals with the new securities that were not previously available to the investing public, i.e. the securities that are offered to the investing public for the first time.

• A new issue market provides an opportunity for issuers of securities, the Government as well as corporations, to raise resources to meet their requirements of investment and/or discharge some obligation.

Methods of Floating New Issues:

The methods by which new issues of shares are floated in the primary market in India are:

1. Public Issue: Public Issue The most popular method for floating the issues in the new issue market is through a “prospectus” which is viewed as a legal document. A common method followed by corporate enterprises to raise capital through the issue of securities is employing a prospectus inviting subscriptions from the public.

• Under this method, the issuing companies themselves offer directly to the general public a fixed number of shares at a stated price known as the face value of the securities. Public issues can be further classified into Initial Public Offerings (IPOs) and Further Public Offerings (FPOs).

2. Offer for Sale: Institutional investors like business enterprise funds, private equity funds, etc., invest in an unlisted company when it is very small or at an early stage. Under this method, securities are not issued directly to the public but are offered for sale through ‘ intermediaries like issuing houses or stock brokers.

3. Private Placement: A private placement is the allotment of securities by a company to institutional investors and some selected individuals. Public offers are an exclusive concern. The subsidiary cost of IPOs lean to be very high. This is why some companies favor not to go down this route.

• It helps to raise capital more quickly than a public issue. They offer investment opportunities to a select few individuals. The private placement is contradictory to a public issue, in which securities are made accessible for sale on the open market.

4. Rights Issue: It means an issue of capital to be offered by the company to its existing shareholders through a letter of offer, under section 62 of the Companies Act 2013.

• A listed company issues fresh securities to its existing shareholders only. The rights are offered in a specified ratio to several securities held before the issue by the shareholder. The ratio is fixed based on the capital requirement of the company.

5. e-IPOs: It stands for Electronic Initial Public Offer. A company proposing to issue capital to the public through the online system of the stock exchange has to agree with the stock exchange. When a company wants to offer its shares to the public it can now also do so online.

• This is called an Initial Public Offer (IPO). An agreement is signed between the company and the related stock exchange known as the e-IPO. The issuing company is also required to assign a registrar to have electronic connectivity with the exchange.

6. Issue of Indian Depository Receipts (IDR): A foreign company that is listed on the stock exchange abroad can raise money from Indian investors by selling (issuing) shares.

• These shares are held in trust by a foreign custodian bank against which a domestic custodian bank issues an instrument called Indian depository receipts (IDR), denominated in ‘.
• IDR can be traded in the stock exchange like any other shares and the holder is entitled to rights of ownership including receiving dividend

Question 9. What is an IPO? Write its types, advantages, and disadvantages.
Answer: An initial public offering (IPO), otherwise known as a stock market launch, is a public offering in which shares of a company are sold to investors.

• Initial public offerings can be used to raise new capital for companies- to gain more funding to monetize the investments of shareholders.

Types of IPOs:

Generally, there are two types of IPOs. A company gets a boost when people start buying their equities. The two basic types of IPOs are

1. Fixed Price Issue: In a Fixed Price Issue, the price of the offerings is evaluated by the company along with their underwriters. They evaluate the company’s assets, liabilities, and every financial aspect. They then work on these figures and fix a price for their offerings. The price is fixed after considering all the qualitative and quantitative factors.

• In a fixed price issue, the fixed price may be undervalued during the company’s IPO. The price is mostly lower than the market value. As a result, investors are always very interested in fixed price issues and ultimately revalue the company positively.

2. Book Building Issue: A book-building issue is a comparatively new concept in India compared to other parts of the world. In a book-building issue, there is no fixed price, but a price band or range.

• The lowest and the highest price is called ‘floor price’ and ‘cap price’ respectively. You can bid for the shares with the desired price you would like to pay. Thereafter the price of the stock is fixed after evaluating the bids. The demand for the share is known after each day as the book is built.

Advantages:

1. Increasing and diversifying the equity base
2. Cheaper avenues for raising capital
3. More exposure, prestige, and enhanced public image
4. Ability to attract and hire better employees and the management to oversee them through liquidity participation
5. To enable acquisitions
6. Creating multiple financing opportunities through equity, convertible debt, etc

Disadvantages:

1. Rise in marketing and accounting costs that will mount as time goes on
2. It is necessary to disclose sensitive financial and business information.
3. More effort and attention are required of the management to ensure an IPO goes smoothly.
4. Chances of additional funding might not be acquired in case the company does not perform well
5. Public disclosure of information might be exploited by competitors or even customers
6. The initial shareholders may lose independence as new ones will come in through the ability to buy new shares.
7. The company will be exposed to the risk of litigation, private securities, and other forms of derivative actions.

Question 10. What is an IPO? Write the SEBI Guidelines for IPOs.
Answer: IPO stands for Initial Public Offering. Initial Public Offering (IPO) can be defined as the process by which a private company or corporation can become public by selling a portion of its stake to the investors.

• An IPO is generally initiated to infuse the new equity capital.to the firm, to facilitate easy trading of the existing assets, to raise capital for the future, or to monetize the investments made by existing stakeholders.

SEBI Guidelines for IPOs:

The salient features of these guidelines are given below:

1.  Promoters should contribute a minimum of 20% of the total issued capital if the company is an unlisted one. The promoter’s contribution is subject to a lock-in period of 3 years.
2. Net Offer to the General Public has to be at least 25% of the Total Issue size for listing on a Stock Exchange.
3. A minimum of 50% of the Net offer to the Public has to be reserved for Investors applying for 10 or less than 10 marketable lots of shares.
4. In an Issue of more than Rs. 100 crores the issuer is allowed to place the whole issue by book-building.
5. 5. There should be at least 5 investors for every 1 lakh of equity offered.
6. Allotment has to be made within 30 days of the closure of the Public Issue and 42 days in case of a Rights Issue. All the listing formalities for a Public Issue have to be completed within 70 days from the date of closure of the subscription list.
7.  Indian Development Financial Institutions and Mutual Funds can be allotted securities up to 75% of the Issue Amount.
8. Allotment to categories of Fll’s and NRI’s/OCB is up to a maximum of 24% which can be further extended to 30% by an application to the RBI – supported by a resolution passed in the General Meeting.
9. 10% individual ceiling for each category a) Permanent employees b) Shareholding of the promoting companies
10. Securities issued to the promoter, and his group companies by way of firm allotment and reservation have a lock-in period of 3 years. However, shares allotted to Fll’s and certain Indian and Multilateral Development Financial Institutions and Indian Mutual Funds are not subject to Lock-in periods.
11. The minimum period for which a Public Issue has to be kept open is 3 working days and the maximum for which it can be kept open is 10 working days. The minimum period for a Rights Issue is 15 working days and the maximum is 60 working days.
12. A public issue is effected if the issue can procure 90% of the Total issue size within 60 days from the date of earliest closure of the Public Issue. In case of over-subscription, the company may have the right to retain the excess application money and allot shares more than the proposed Issue which is referred to as the ‘green-shoe’ option.
13. A Rights Issue has to procure a 90% subscription within 60 days of the opening of the Issue.

Question 11. Write the Principal steps of a Public Issue.
Answer: A draft prospectus is prepared giving out details of the Company, promoter background, Management, terms of the issue, project details, modes of financing, past financial performance, projected profitability, and others. Additionally, a Venture Capital Firm has to file the details of the terms subject to which funds are to be raised in the proposed issue in a document called the placement memorandum”.

Some of the steps involved in a public issue are

1. Appointment of underwriters: The underwriters are appointed who commit to shoulder the liability and subscribe to the shortfall in case the issue is undersubscribed. For this commitment, they are entitled to a commission up to a maximum of 2.5% on the amount underwritten.

2. Appointment of Bankers: Bankers along with their branch network act as the collecting agencies and process the funds procured during the public issue. The Banks provide temporary loans for the period between the issue date and the date the issue proceeds become available after allotment, which is referred to as a ‘bridge loan’.

3. Appointment of Registrars: Registrars process the application forms, tabulate the amounts collected during the Issue, and initiate the allotment procedures.

4. Appointment of the Brokers to the Issue: Recognized members of the Stock exchanges are appointed as brokers to the Issue for marketing the Issue. They are eligible for a maximum brokerage of 1.5%.

5. Filing of the prospectus with the Registrar of Companies: The draft prospectus along with the copies of the agreements entered into with the Lead Manager, Underwriters, Bankers, Registrars, and Brokers to the issue is filed with the Registrar of Companies of the state where the registered office of the company is located

6. Printing and dispatch of Application forms: The prospectus and application forms are printed and dispatched to all the merchant bankers, underwriters, and brokers to the issue.

7. Filing of the initial listing application: A letter is sent to the Stock exchanges where the issue is proposed to be listed giving the details and stating the intent of getting the shares listed on the Exchange.

8. Statutory announcement: An abridged version of the prospectus and the Issue start and close dates are published in major English dailies and vernacular newspapers.

9. Processing of applications: After the close of the Public Issue all the application forms are scrutinized, and tabulated, and then shares are allotted against these applications.

10. Establishing the liability of the underwriter: In case the Issue is not fully subscribed to, then the liability for the subscription falls on the underwriters who have to subscribe to the shortfall, in case they have not procured the amount committed by them as per the Underwriting agreement.

11. Allotment of shares: After the Issue is subscribed to the minimum level, the allotment procedure as prescribed by SERI is initiated.

12. Listing of the Issue: The shares after having been allotted have to be listed compulsorily in the regional stock exchange and optionally at the other stock exchanges.

Question 12. Write about the recent trends in the Primary Market.
Answer: Many improvements and reforms over the last few years have been made in the field of capital markets. It has increased the transparency, integrity, and efficiency of the operation of trading. Stock exchanges have increased the quality of price discovery and decreased the cost of transactions.

NSE’s and BSE’s trading terminals provide services in each part of the country. Computer-based transaction systems and depositories have reduced risks. Some recent changes in capital markets are as under:

1. Various Amendments in Securities Exchange Board of India Act, 1992; SEBI Act has been amended by making the following changes:

• Empowering SEBI with powers of search and seizure,
• Impose penalty on the violator.

2. Solution of UTI Problems: The Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 was passed by repealing the Unit Trust of India Act, 1963 so that a one-time solution to the problem can be sought.

3. Encourage Retail Trading in Government Securities: Retail trading is encouraged in gilt-edged securities. Due to this all classes of investors can contribute to it.

4. Training Arrangement: The Securities and Exchange Board of India has made arrangements to provide training to take part in the security market and to encourage research.

5. Development of Debts Market: Indian Clearance Corporation has started functioning for the clearance and settlement of transactions.

6. Takeover Regulation: SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 makes provisions for disinvestments of public sector undertakings, additional disclosure requirements, etc. The Securities and Exchange Board of India announced an amnesty scheme.

7. Self-Regulatory Organisation: Now, all market intermediaries can become members of one or more self-regulatory organizations.

8. Other Recent Trends: In addition to the above following are some other trends in the capital market:

• A Commencement of trading in stock index futures, stock index options and stock options,
• Beginning of electronic data and information filling and retrieval system (Its object is to make electronic filing by the listed companies),
• Beginning of online inter-depository transfer,
• Demutualization of stock exchanges,
• Beginning of rolling settlement for all scrips on all stock markets,
• Issuance of SEBI (Sweat Equity) Regulation, 2002, .
• Compulsory Benchmarking of debt-oriented and balance fund.
• The Indian capital market has witnessed significant growth over the past few decades, driven by various factors, including economic liberalization, privatization, and globalization.
• The market has also been buoyed by a growing middle class with a greater propensity to invest in financial assets, increasing investor awareness and education, and the development of technology-enabled platforms for trading and investing.
• The equity market is the largest segment of the Indian capital market, with the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) being the major exchanges. The Indian equity market has seen a surge in activity, with the number of listed companies increasing from around 5,000 in the early 2000s to over 7,000 in recent years.
• The market capitalization of Indian companies listed on the stock exchanges has also grown significantly, from around $200 billion in 2000 to over $4 trillion as of 2023.

Question 13. What do you mean by stock exchange/Secondary Market? Give its characteristics.
Answer: A stock exchange is an organized market for buying and selling corporate and other securities. Here, securities are purchased and sold out as per certain well-defined rules and regulations. It provides a convenient and secure mechanism or platform for transactions in different securities.

• Such securities include shares and debentures issued by public companies which are duly listed on the stock exchange, and bonds and debentures issued by government, public corporations, and municipal and port trust bodies.

Definition:

The Indian Securities Contracts (Regulation) Act of 1956, defines the Stock Exchange as, “An association, organization or body of individuals, whether incorporated or not, established to assist, regulate and controlling business in buying, selling and dealing in securities.”

Features of Stock Exchange:

These are various qualities of a Stock Exchange. Such qualities are enumerated below:

1. Market for Securities: A stock exchange is a market, where securities of corporate bodies, government, and semi-government bodies are bought and sold.

2. Deals in Second Hand Securities: It deals with shares, debentures bonds, and such securities already issued by the companies. In short, it deals with existing or second-hand securities and hence it is called a secondary market.

3. Regulates Trade in Securities: The stock exchange does not buy or sell any securities on its account. It merely provides the necessary infrastructure and facilities for trade in securities to its members and brokers who trade in securities. It regulates the trade activities to ensure free and fair trade.

4. Allows Dealings only in Listed Securities:– In fact, stock exchanges maintain an official list of securities that could be purchased and sold on its floor. Securities that do not figure in the official list of the stock exchange are called unlisted securities. Such unlisted securities cannot be traded on the stock exchange.

5. Transactions Effected only through Members: All the transactions in securities at the stock exchange are effected only through those allowed to enter the trading circles of the stock exchange. Investors have to buy or sell the securities at the stock exchange through authorized brokers only.

6. Association of Persons: A stock exchange is an association of persons or bodies of individuals which may be registered or unregistered.

7. Recognition from Central Government: The stock exchange is an organized market. It requires recognition from the Central Government.

8. Working as per Rules: Buying and selling transactions in securities at the stock exchange are governed by the rules and regulations of the stock exchange as well as SEBI Guidelines. No deviation from the rules and guidelines is allowed in any case.

9. Specific Location: A stock exchange is a particular marketplace where authorized brokers come together daily (i.e. on working days) on the floor of the market called trading circles and conduct trading activities.

• The prices of different securities traded are shown on electronic boards. After the working hours market is closed. All the working of stock exchanges is conducted and controlled through computers and electronic systems.

10. Financial Barometers: Stock exchanges are the financial barometers and development indicators of the national economy of the country. Industrial growth and stability are reflected in the index of the stock exchange.

Question 14. What is meant by the Secondary Market / Stock Exchange? Discuss its functions and objectives.
Answer: A stock exchange is a marketplace where financial instruments (shares, stocks, bonds, etc.) are bought and sold. It acts as a platform where investors (buyers and sellers) come together to trade financial instruments.

Definition:

According to Hastings, “Stock exchange or securities market comprises all the places where buyers and sellers of stocks and bonds or their representatives undertake transactions involving the sale of securities.”

Functions of Stock Exchange:

Some of the Important Functions of the Stock Exchange/Secondary Market are listed below:

1. Economic Barometer: A stock exchange is a reliable barometer to measure the economic condition of a country. Every major change in the country and economy is reflected in the prices of shares. The rise or fall in the share prices indicates the boom or recession cycle of the economy. Stock exchange is also known as a pulse of economy or economic mirror which reflects the economic conditions of a country.

2. Pricing of Securities: The stock market helps to value the securities based on demand and supply factors. The securities of profitable and growth-oriented companies are valued higher as there is more demand for such securities.

• The valuation of securities is useful for investors, government, and creditors. The investors can know the value of their investment, the creditors can value the creditworthiness, and the government can impose taxes on the value of securities.

3. Safety of Transactions: In the stock market only the listed securities are traded and stock exchange authorities include the company’s names in the trade list only after verifying the soundness of the company. The companies that are listed also have to operate within strict rules and regulations. This ensures the safety of dealing through the stock exchange.

4. Contributes to Economic Growth: In the stock exchange securities of various companies are bought and sold. This process of disinvestment and reinvestment helps to invest in the most productive investment proposal and this leads to capital formation and economic growth.

5. Spreading of Equity Cult: The Stock exchange encourages people to invest in ownership securities by regulating new issues, better trading practices, and educating the public about investment.

6. Providing Scope for Speculation: To ensure liquidity and demand of supply of securities the stock exchange permits healthy speculation of securities.

7. Liquidity: The main function of the stock market is to provide a ready market for the sale and purchase of securities. The presence of the stock exchange market gives assurance to investors that their investments can be converted into cash whenever they want. Investors can invest in long-term investment projects without any hesitation, as because of the stock exchange they can convert long-term investments into short-term and medium-term.

8. Better Allocation of Capital: The shares of profit-making companies are quoted at higher prices and are actively traded so such companies can easily raise fresh capital from the stock market. The general public hesitates to invest in securities of loss-making companies. So stock exchange facilitates the allocation of investor’s funds to profitable channels.

9. Promotes the Habits of Savings and Investment: The stock market offers attractive opportunities for investment in various securities. These attractive opportunities encourage people to save more and invest in securities of the corporate sector rather than investing in unproductive assets such as gold, silver, etc.

Objectives of Stock Exchange:

The primary objectives of a secondary market are to provide marketability to existing securities and to facilitate the acquisition of capita! by corporate enterprises. To accomplish these objectives, the secondary market performs the following functions:

1. To provide for a regular market: The secondary market provides for a ready and continuous market where those desiring to deal in securities assemble to buy and sell securities during business hours. This enables investors to liquidate their investments quickly and with the least possible loss.

2. To provide stability in the prices of securities: Through the mechanism of regular purchase and sale of securities, the secondary market ensures continuity and stability in share price which is an essential requirement of liquidity.

3. Regular valuation of securities: A well-developed secondary market disseminates full information about listed companies to attract a large number of informed buyers and sellers from all walks of life and to arouse keen competition among them resulting in the establishment of the fairest possible price.

4. To provide safety in dealings: A well-organized and regulated secondary market ensures a greater measure of safety and fair dealings to the average investors because transactions are made publicly under well-defined rules, regulations, and by-laws of the exchange.

5. To ensure wide ownership of securities: A secondary- market ensures wider distribution of securities. If a company’s securities are listed in different stock markets of the country, its securities will be bought and sold by persons spread across the country, and ownership of securities is widely diffused.

Question 15. Write the benefits and limitations of the Stock Exchange.
Answer: A stock exchange is an organized market, where second-hand securities that have been listed thereon, may be bought and sold, in a safe, quick, and convenient manner.

Definition: According to Husband and Dockerary, “Stock exchanges are privately organized markets which are used to facilitate trading in securities.”

Benefits of Stock Exchange: The Benefits of the Stock Exchange are classified into Benefits to the Community, Company, and Investors.

Benefits to the Community:

1. Economic Development: It accelerates economic development by ensuring a steady flow of savings for productive purposes.

2. Fund Raising Platform: It enables well-managed, profit¬making companies to raise limitless funds by fresh issue of shares from time to time.

3. Tools to Divert Resources: Scarce resources are thus diverted to efficiently run enterprises for better utilization.

4. Capital Formation: It encourages capital formation.

5. Fund Raiser for Government: It enables the Government to raise funds for undertaking projects through the sale of securities on the stock exchange. Thus stock exchange serves as a platform for raising public debt.

Benefits to the Company:

1. Enhances Goodwill or Reputation: Companies whose shares are quoted on a stock exchange enjoy greater goodwill and credit standing.

2. Wide Market: There is a wide and ready market for such securities.

3. Raises huge funds: The Stock Exchange can raise huge funds easily by issuing shares and debentures.

4. Increases bargaining strength: Companies whose shares rise in the stock exchange command higher bargaining power in the event of further expansion, merger, or amalgamation.

Benefits to Investors:

1. Liquidity: Stock exchange helps investors to convert their shares into cash quickly and thus increases the liquidity of their investments.

2. Adding collateral value of security: The fact that a security is dealt with on a stock exchange makes it a good collateral security for obtaining loans from banks.

3. Investor protection: The stock exchange safeguards, the investor’s interest and ensures fair dealing by strictly enforcing its rules and regulations.

4. Assessing the real worth of security: An investor can easily assess the real worth of securities in his hands, as market quotations are published daily in the newspapers and websites.

5. Mechanism to trade security: The Stock Exchange provides a mechanism by which the purchase and sale of listed securities take place in a matter of few minutes.

Limitations of Stock Exchange:

The limitations of the stock exchange are as follows:

1. Lack of uniformity and control of stock exchanges
2. Absence of restriction on the membership of stock exchanges
3. Failure to control unhealthy speculation
4. Allowing more than one charge in the place
5. Non-insistence of margin requirement in stock exchange or in the case of produce exchanges
6. No proper regulation of listing of securities on the stock exchange

Question 16. Discuss the role of stock exchanges in India.
Answer: Stock exchanges play an important role in the economic development of a country. Thus, the growth of a country depends on its performance. The role of the stock exchange in the economic development of a country is as under:

1. Raising Capital for Businesses: Stock exchange enables the corporate sector to raise capital from the market by selling the shares of a company to the investing public.

2. Mobilizing Savings for Investment: The stock exchange helps the public to mobilize their savings and invest in the sectors that can yield high returns to them. Such investment provides higher yield to the individuals as well as to the country.

3. Facilitating Company Expansion: Stock exchange facilitates companies to grow and expand through acquisitions or fusion.

4. Profit Sharing: The Stock market facilitates investors to receive their share in the wealth of businesses that are earning huge profits.

5. Corporate Governance: The companies need to comply with different regulations to get listed on the stock exchange. Thus, they have a better record of management as compared to private companies.

6. Creating Investment Opportunities for Small Investors: Stock exchange provides equal investment opportunities to small investors. Small integrated investments enable larger companies to grow and lead to economic development.

7. Government Capital Rising for Development Projects: The stock market is equally helpful in raising capital for the development projects undertaken by the government through the issue of bonds. An investor investing in such securities would get fixed returns and tax advantages.

8. Barometer of Economy: The stock exchange is also responsible for maintaining the stock indices. Such stock indices are the indicators of trends prevailing in the economy. It is equally responsible for regulating the variations in stock price.

Question 17. Write about the evolution and growth of Stock Exchanges in India.
Answer: The history of security trading in India takes us to the 18th century when the East India Company began trading in loan securities.

1. In the 1830s corporate shares were started in trading along with cotton presses. It was a very simple and kind of informal beginning for the stock exchange in India as it started under a banyan tree in Bombay (Mumbai) with only 22 stock brokers. A decade later it shifted to Meadows Street
2. Junction and the shift continued to take place as the number of stockbrokers increased and settled in Daial Street. This was known as the Native Share and Stockbrokers Association and in 1875, it was renamed the Bombay Stock Exchange. It is the oldest in Asia and is also the first one which get permanent recognition by the Securities Contract Regulation Act of 1956.
3. After BSE, the Ahmedabad Stock Exchange was founded in 1894 which mainly focused on the trading of shares of textile mills. Then, the Calcutta Stock Exchange began operations ini908 and it focused on the trading of shares of plantations and jute mills.
4. After independence, the volume of trading was dominated by the BSE.
5. However, there was a high need for market regulators because the BSE being the sole body had a very low level of transparency and undependable clearing systems and other important factors. This was when The Securities and Exchange Board of India (SEBI) was founded in the year 1988 as a non-statutory body and it was made statutory in the year 1992.
6. After the Harshad Mehta Scam in the year 1992, it was realized that there was a need for another stock exchange that was large enough to compete with the BSE and that could bring clarity and transparency to the stock market.
7. This gave rise to the National Stock Exchange (NSE) in 1992. It was recognized as a stock exchange in the year 1993 and thereafter trading began in 1994. NSE was the first stock exchange to perform trading electronically. In response to this initiative, BSE also introduced an electronic trading system, and it was called BSE On-Line Trading (BOLT) in the year 1995.
8. The Sensex was first introduced in 1986 by the Bombay Stock Exchange as the sensitivity index and it had an index of 30 companies. It measured the overall performance of the exchange. Equity Derivatives was launched in the year 2000 and Index as well as stock options in 2001. Also, India’s first free float index, BSE Teck was launched in the same year 2001.
9. The National Stock Exchange introduced its exchange milestone as the CNX Nifty, which is now known as the Nifty 50, in 1996. NSE has 50 stocks registered and it functions as the overall performance measure of the exchange.
10. The BSE and the NSE are not the only stock exchanges in our country. After the independence, there were about 23 stock exchanges registered but at present, there are only 7 stock exchanges that are recognized by SEBI. Apart from NSE and BSE, there are Calcutta Stock Exchange Ltd, Magadh Stock Exchange of India Ltd, Metropolitan Stock
11. Exchange of India Ltd, India International Exchange (India INX), and NSE IFSC Ltd. All the others that were once functioning were granted exit by SEBI.
12. There were differences in the pattern of investments in the pre-independence and post-independence eras. Before independence, the management system in the country was not so reliable and transparent in its actions. There were a limited number of companies and the Britishers were mostly interested in the growth of companies in London.
13. There was also no guiding agency for the common mass that would have helped in promoting investments. The public was more interested in investing in gold and ornaments than any company securities. After independence, the Indian government took measures to promote investments.
14. Two important acts were passed- the Indian Companies Act 1956 and the Securities Contract and Regulations Act 1956. Hence there was a steady growth in the Indian capital market. The risk of the investors was also safeguarded through the acts.

Question 18. What are the major stock exchanges in India?
Answer: A Stock Exchange is a place where traders buy and sell securities. A stock exchange is often the most important component of a stock market. The auction of securities is done systematically, i.e. abiding by certain rules and regulations.

Major Stock Exchanges in India:

The major stock exchanges in India are stated below:

1. Bombay Stock Exchange (BSE): Bombay Stock Exchange was formed in 1875 and is one of the two principal large stock exchanges in India. The major objective of BSE is to provide an efficient and transparent market for trading currencies, equities, mutual funds, etc.

• It is also the world’s fastest exchange with a median trade speed of six microseconds. The Indian government recognized it officially as per the Securities Contracts Regulation Act in August 1957. Approximately 5000 companies are listed in BSE.

2. National Stock Exchange (NSE): National Stock Exchange is the leading stock exchange in India. It was established in the year 1992 as the first dematerialized electronic exchange in the country.

• It was the first exchange to provide a fully automated screen-based trading system to the investors to facilitate easy trading. In the year 1993, NSE registered itself as a stock exchange under the Securities Contract Regulations Act.
• The benchmark index of NSE, Nifty 50 is used extensively by investors around the world to keep track of the Indian capital market. NSE also played an important role in the creation of the National Securities Depository Limited.

3. Calcutta Stock Exchange (CSE): Calcutta Stock Exchange is the second oldest stock exchange in Southeast Asia and was incorporated in the year 1908 with 150 members. Presently, CSE is located at the Lyons Range.

• It was granted recognition under the relevant provisions of the Securities Contract (Regulation) Act, of 1956, and was replaced by the screen-based trading system only in the year 1997. The matter about the exit of the Calcutta stock exchange by SEBI is pending before the Calcutta High Court.

4. Metropolitan Stock Exchange (MSE): The Metropolitan Stock Exchange was recognized as a “notified stock exchange” in the year 2012 by SEBI. MSE offers an electronic and hi-tech trading platform in Capital Markets, Debt Markets, Futures & Options.

5. India International Exchange (India INX): India International Exchange Limited is India’s first International Financial Services Centre located in Gujarat. Their operations started in 2017 and are a subsidiary of BSE Limited.

• The exchange offers a single-segment approach for all asset classes such as equities, currencies, commodities, etc. The exchange uses an advanced technology platform and is the fastest in the world with a turn-around time of 4 microseconds.

6. NSE IFSC Limited: On November 26th, 2016, NSE IFSC Limited (NSE International Exchange) was incorporated by the Registrar of Companies, Gujarat. It is a fully owned subsidiary company of the National Stock Exchange of India Limited (NSE).

To increase access to financial markets, the NSE International Exchange has been launched to grow the financial market as well as to bring capital into India. Furthermore, Stock exchanges operating in the GIFT IFSC are permitted to offer trading in securities in any currency other than the Indian rupee.

Question 19. Write about the recent developments in Indian Stock Exchanges.
Answer: The structure of the stock market in India has undergone a vast change due to the liberalization process initiated by the Government. Several new structures have been added to the existing structure of the Indian stock exchange. A brief description of these structures in the Indian stock market system is presented below:

1. Economic Liberalization due to the Indian Capital Market: Economic liberalization has led to more deregulation, liberalization, and privatization of some of the public sector undertakings in Asia. This has resulted in the shares of some of the public sector undertakings being made available to the Public.

2. Promoting more private sector banks: Opening of more private sector banks has resulted in the public contributing to the shares of these banks in the Indian capital Market. Recently, the government has announced 74% equity participation by foreigners in private sector banks in India.

3. Promotion of Mutual Funds: The promotion of mutual funds by nationalized as well as non-nationalized banks has also improved the Indian capital market. They were helpful to the public by way of tax-saving schemes. Example: UTI’s monthly income scheme.

4. Regulation of NRI Investments: The Amendment of the Foreign Exchange Regulation Act (FERA) into the Foreign Exchange Management Act (FEMA) has given more encouragement to non-resident investors. The percentage of NRI investment in Indian companies has increased from 5% to 24%.

5. Direct Foreign Investment: The Foreign Investment Promotion Board, consisting of the Secretaries of Industries, finance, and foreign affairs, has allowed more direct foreign investment in the core sector, especially in the power sector.

6. FERA Companies: Under the Foreign Exchange Regulation Act, a FERA company has 40% equity participation by foreigners. This limit has been removed and now even foreign companies are allowed to have 51% equity participation. For example, Colgate Palmolive has increased its foreign equity participation from 40 to 51%.

7. Online Trading in Indian Capital Market: Some of the leading stock markets in India have introduced computer systems for their trading activities. The brokers can get hooked up and do their trading on an online basis. The computer terminals will enable the public and the brokers to know the price prevailing in the market at any time. This will prevent speculation activities.

8. Transparency through online trading: Online trading through a computer has brought transparency to the transactions in the market. People can know prices prevailing in the market at any time and as such the brokers cannot deprive their clients of their profits. The manipulation of the opening and closing prices of shares by the brokers in the market is no longer possible.

9. National Stock Exchange: A new stock market called the National Stock Exchange has been created and a large number of companies have been listed. It is a big competitor to the Bombay Stock Exchange and it can even influence the Bombay Stock Exchange. The National Stock Exchange deals in shares of companies throughout India and the prices prevailing in the market is a benchmark for stock prices.

10. Sensitivity Index in Indian Capital Market: The calculation of the index number has also changed. A sensitivity index has been introduced which represents important 30 companies whose volume and value of shares determine the market condition. The sensitivity index is an indication of the conditions prevailing in the market and the conditions that are likely to be encountered by the market.

11. Demating of shares in the Indian Capital Market: The introduction of demating has resulted in improving transactions further. Demating is a system under which the physical delivery of shares is no more adopted. It is called “scripless trade”.

12. Securities and Exchange Board of India: The creation of the Securities and Exchange Board of India (SEBI) is an important development in the Indian capital market of India. SEBI has not only replaced the Controller of Capital issues but has brought uniformity in the transactions in all stock exchanges.

13. Renewal of Registration: All the brokers and sub-brokers have to register afresh with SEBI and any complaints against them will be inquired and if found guilty, punishment is given.

14. Over The Counter Exchange of India (OTCEI): For newly promoted companies, another stock exchange with a lesser degree of conditions has been promoted and it is called Over The Counter Exchange of India (OTCEI). It may not be possible for all the new companies to list their shares with the existing stock exchanges.

The share capital of these companies will be low and hence there should be an arrangement for listing such companies’ shares. The creation of Over The Counter Exchange of India (OTCEI) is helpful to these newly promoted companies.

15. Non-Banking Financial Companies: The role of non-financial companies has also been controlled. RBI has introduced new conditions, restricting their activities. New norms about the capital of non banking financial companies have been introduced. For chit funds, a separate Act has been passed and it restricts the maximum bidding to 40%.

16. Government Securities Market: After the stock scam, the Central Government has de-linked Government securities from trading along with company securities. In other words, there will be a separate market for Government securities and they will not be dealt along with company securities in the stock market. The measure was taken by Dr. Manmohan Singh when he was the Finance Minister.

Question20. What is SEBI? Discuss the orga objectives, powers, and functions of SEBi. (OR) Write the regulatory framework of Indian Stock Exchanges.
Answer: SEBI stands for Securities and Exchange Board of India. It is a statutory regulatory body that was established by the Government of India in 1992 to protect the interests of investors investing in securities along with regulating the securities market. SEBI also regulates how the stock market and mutual funds function.

The main purpose of SEBI is to safeguard the rights and interests of the investor, reduce malpractices related to the stock exchange, establish a code of conduct, and promote the healthy functioning of the stock exchange.

Organizational Structure:

The SEBI Board consists of nine members:

1. One Chairman appointed by the Government of India
2. Two members are officers from the Union Finance Ministry
3. One member from the Reserve Bank of India
4. Five members appointed by the Union Government of India Objectives of SEBI:

The fundamental objective of SEBI is to safeguard the interests of all the parties involved in trading. It also regulates the functioning of the stock market. SEBI’s objectives are: x To monitor the activities of the stock exchange x To safeguard the rights of the investors

To curb fraudulent practices by maintaining a balance between statutory regulations and self-regulation x To define the code of conduct for the brokers, underwriters, and other intermediaries Powers of SEBI:

SEBI has been vested with the following powers:

1. Power to call periodical returns from recognized stock exchanges.
2.  Power to call any information or explanation from recognized stock exchanges or their members.
3. Power to direct inquiries to be made about affairs of stock exchanges or their members.
4.  Power to approve by-laws of recognized stock exchanges.
5. Power to make or amend by-laws of recognized stock exchanges.
6.  Power to compel listing of securities by public companies.
7. Power to control and regulate stock exchanges.
8. Power to grant registration to market intermediaries.
9. Power to levy fees or other charges for carrying out the purpose of regulation
10. Power to declare applicability of Section 17 of the Securities Contract (Regulation) Act is any state or area to grant licenses to dealers in securities

Functions of SEBI:

The SEBI performs some functions to meet its objectives and they are:

1. Protective Functions: In the protective functions, the SEBI tries to protect the interest of the investor and provide them the safety towards their investment. Below are the points that are initiated in the protective functions by the SEBI:

• It prohibits Insider Trading. x It checks the price rigging.
• It also prohibits fraudulent and unfair trade practices.
• SEBI always promotes the code of conduct in the security market and fair practices.
• SEBI also takes the steps to make the investor educated about the market so that they make themselves able to evaluate the securities of the various companies and select the most profitable for them.

2. Developmental Functions: These developmental functions are performed by the SEBI to promote and develop the activities in the stock exchange and to increase the business in the stock exchange. For this, the main pointers that the developmental functions are working on are:

• SEBI gives and promotes the training of the intermediaries of the security market.
• SEBI makes the steps to adopt the flexible approach for increment in the activities of the stock market.

3. Regulatory Functions: In the regulatory functions, the SEBI tries to regulate the business in the stock exchange. To regulate the activities of the stock market the regulatory functions include,

• SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries.
• These intermediaries have been brought by the regulatory purview and the private placement that has been more restrictive eventually.
• SEBI regulates the working of Mutual Funds.
• SEBI regulates the takeover of companies.
• SEBI also conducts inquiries and audits of the stock exchange.

Question 21. Examine the Role / Significance of SEBI.
Answer: SEBI was established as a non-statutory board in 1988 and in January 1992, it was accorded statutory status. The regulatory powers of SEBI were increased in January 1995.

• It has now become a very important constituent of the financial regulatory framework in India. The SEBI is under the overall control of the Finance Ministry.

1. Promotion and Development of Capital Market: One of the important roles of SEBI is the promotion and development of the capital market. It protects the rights and interests of investors, especially the individual investors. It prevents trading malpractices. Its regulatory measures are meant for the healthy development of capital markets.
2. Regulatory Role: Another important role of SEBI is the regulation of the security markets in India. The SEBI can frame or issue rules, regulations, directives, guidelines, and norms concerning primary and secondary markets.

3. Protection of Interest of Investors: An important role of SEBI is the protection interest of investors in securities. SEBI has introduced various measures to protect the interests of investors. To ensure no malpractice takes place in the allotment of shares, a representative of SEBI supervises the allotment process.

4. Investor’s Education: SEBI has a role in educating investors about the securities market. It issues advertisements from time to time to enlighten investors on various issues related to the securities market and their rights and remedies.

5. Investor’s Grievances Redressal: SEBI plays another role in redressing the investor’s grievances. SEBI has introduced an automated complaint-handling system to deal with investor complaints. The Investor Grievances Redressal and Guidance Division of SEBI assists investors who want to make complaints to SEBI against listed companies.

6. Primary Market Policy: SEBI looks after all the policy matters and regulatory issues concerning the primary market. It is responsible for vetting all the prospectuses and letters of offer for public and right issues, for coordinating with the primary market policy, and for registration, regulation, and monitoring of issue-related intermediaries.

7. Secondary Market Policy: SEBI is responsible for all policy and regulatory issues for the secondary market and new investment products. It is also responsible for the registration and monitoring of members of stock exchanges, administration of some of the stock exchanges, and monitoring of price movements and insider trading.

8. Institutional Investment Policy: SEBI looks after institutional investment policy with respect to domestic mutual funds and Foreign Institutional Investors (Fils). It also looks after the registration, regulation, and monitoring of Fils and domestic mutual funds.

9. Facilitates Mobilisation of Resources: The SEBI plays an important role in facilitating an efficient mobilization and allocation of resources through the securities market, stimulating competition, and encouraging innovations.

Question 22. What do you mean by Listing of Securities? Bring out the guidelines of SEBI for listing in stock exchanges
Answer: Listing means that the securities have been included in the list of securities that may be traded at a stock exchange. The securities may be of any public limited company, Central or State Government, quasi-governmental and other financial institutions/corporations, municipalities, etc.

• According to Regulation 4(2) of SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009, no issuer shall make a public issue or rights issue of securities unless they make an application to one or more recognized stock exchanges and have chosen one of them as a designated stock exchange.
• In the case of an Initial Public offer, it is required for the issuer to make an application for Shares Listing in at least one recognized stock exchange having nationwide trading terminals.

Listing Conditions and Requirements:

• The company has to follow specified conditions before Shares are listed on the stock exchange:
• Shares of a company shall be offered to the public through the prospectus, and 25% of securities must be offered.
• The date of opening of the subscription, receipt of the application, and other details should be mentioned in the prospectus.
• The capital structure of the company should be wide and the securities of the company should be in public interest.
• The requirement for the Minimum issued is Rs. 3 Crores out of which 1.8 Crore must be offered to the public.
• There is a requirement of at least 5 public shareholders in respect of every Rs. 1 Lakh of fresh issue of capital and 10 shareholders for every Rs.l lakh of the offer of existing capital.
• In the case of excess application money, the company has to pay interest within the range of 4% to 15% in case there is a delay in the refund and the delay should not be more than 10 weeks from the date of closure of the subscription list.
• The company has paid up share capital of more than Rs. 5 crores and should get itself registered in the recognized stock exchange and compulsorily on the regional stock exchange.
• The auditor or secretary of the company has to declare that the share certificate has been stamped for listing so that shares belonging to the promoter’s quota cannot be sold or transferred for 5 years.
• Letter of allotment, Letter of regret, and letter of a right shall be issued. Receipts for all securities deposited either by way of registration or split.
• Consolidation and renewal certificates will be issued for a certificate of the division, letter of allotment, transfer, letter of rights, etc. The company has to notify the stock exchange regarding the board meeting, the change in the composition of the board of directors, and the case of the new issue of securities in place of a reissue of forfeited shares.
• Due notice should be given to the stock exchange, for closing transfer books for a declaration of dividend, rights issue, or bonus issue.
• After the annual general meeting, the annual return is required to be filed.
• The company is required to comply with the conditions imposed by the stock exchange for the listing of security.
• Documents Required For Listing of Securities In Stock Exchange:

The following documents must be filed with the stock exchanges to get the securities listed:

1.  Memorandum of association and Articles of association
2. Copies of all prospectus and statements instead of prospectus.
3. Copies of balance sheets, audited accounts, agreements with promoters, underwriters, brokers, etc.
4.  Letters of consent from the controller of capital issuer, are now replaced with SEBI.
5. Details of shares and debentures issued and shares forfeited.
6. Details of the issue of bonuses and dividends declared.
7. History of the company in brief.
8. Agreement with the managing director, etc.
9. An undertaking regarding compliance with the provisions of the Companies Act, 2013 and Securities Regulation Act 1956 as well as rules made therein.
10. A list of the highest ten holders of each class or kind of securities of the company.

Listing Procedure:

1. The following are the steps to be followed in listing a company’s securities on a stock exchange:
2. The promoters should first decide on the stock exchange or exchanges where they want the shares to be listed.
3. They should contact the authorities of the respective stock exchange/ exchanges where they propose to list.
4. They should discuss with the stock exchange authorities the requirements and eligibility for listing.
5. The proposed Memorandum of Association, Articles of Association, and Prospectus should be submitted for necessary examination to the stock exchange authorities
6. The company then finalizes the Memorandum, Articles and Prospectus
7.  Securities are issued and allotted.
8. The company enters into a listing agreement by paying the prescribed fees and submitting the necessary documents and particulars.
9. Shares are then and are available for trading.

Question 23. Write the merits and demerits of Listing.
Answer: Listing means the admission of securities of a company to trading on a stock exchange. Listing is not compulsory under the Companies Act. It becomes necessary when a public limited company desires to issue shares or debentures to the public. When securities are listed on a stock exchange, the company has to comply with the requirements of the exchange.

Merits of Listing:

1. Liquidity: Listed shares can be sold at any recognized stock exchange and converted into cash quickly. Finding out buyers would be easy in the security market through brokers and screen-based trading.

2. Best Prices: The price quotations and the volume traded regarding the listed shares appear in the newspapers. According to the demand and supply of the shares, prices are determined. This results in the best price.

3. Regular Information: The transactions of the listed shares regularly appear in the newspaper, providing adequate information regarding the current worth of the securities. Buying and selling activities can be decided based on the price quotations.

4. Periodic Reports: Listed companies have to provide periodic reports to the public. Half-yearly financial reports should be published in the financial newspapers or any other newspapers. In 1985, it was made obligatory for all listed companies to submit unaudited financial results on a half-yearly basis within 2 months of the expiry of that half-year, at present quarterly reports have to be published.

5. Transferability: Listing provides free transferability of securities. After the incorporation of Section 22-A in the Securities Contract (Regulation) Act, the free transfer of shares has been ensured.

6. Income Tax Benefit: The income-tax Act treats the listed companies as widely held companies. The advantages available to a widely held company apply to the listed company.

7. Wide Publicity: Since the prices are quoted in the newspaper, the listed companies get wide publicity. This not only does good to the investor but also to the corporation to attract the public for further issues.

Demerits:

1. Listed companies are subjected to various regulatory measures of the stock exchanges and SEBI.
2. Essential information has to be submitted by the listed companies to the stock exchanges.
3. Annual General Meeting, Annual reports have to be sent to a large number of shareholders. This creates a large amount of unnecessary expenditure.
4. The public offer itself is an expensive exercise. But, this is a pre¬requisite for the company’s shares to be listed.
5. The management is also induced to show keen interest in the price movements for personal gains. They may take advantage of their inside knowledge and indulge in speculation.
6. Securities, that are unable to have a stable value, shall lose their prestige and fall in the esteem of the investors and bankers.
7. The listing makes people depend upon share brokers, jobbers, etc. Many of them are weak speculators and frequently put their clients into difficulties. They create violent price fluctuations.

Question 24. Write about the Secondary Market intermediaries.
Answer: A secondary market is a market where existing shares, debentures, or bonds are traded among investors. After the initial public offering of shares, where the securities are first offered in the primary market are thereafter traded on the secondary market.

• The secondary market is also termed Follow on Public Offering and Aftermarket. In the secondary market, the trade is done between a buyer and seller, and the stock exchange facilitates the transaction. Below are the intermediaries of the Secondary Market.

1. Stockbrokers: Stockbrokers act as direct links between investors and markets. Stockbrokers facilitate trades in secondary markets. An investor can place orders with any SEBI-registered broker, such as Paytm Money, because you cannot place an order directly in the market. To buy or sell shares, you will need to transfer money directly to your broker. The broker will execute the trade and ensure that you get the shares.

2. Depository: The depository houses all records and certificates for investors who have a Demat account. Every listed entity must become a member to maintain all records regarding shares they have issued. In India, there are two depositories

1. NSDL (National Securities Depository Limited) and
2. CDSL (Central Depository Services Limited)
3. SEBI regulates depositories and ensures that all shareholders of listed companies have information.

3. Clearing Corporation: Clearing Corporation in the stock market ensures that the trades are executed successfully and that investors’ Demat accounts are credited or debited with shares. Clearing Corporation guarantees the delivery of shares and provides transparency for buying and selling shares.

4. Agents for Share Transfer: A company may appoint a share transfer agent to keep track of shareholders who have been issued securities. The agent who transfers shares also handles the redemption and transfer of securities.

5. Market Makers: Market makers are entities that provide liquidity in the market by quoting bid and ask prices for securities. They play a crucial role in maintaining an orderly market and facilitating trading. Market makers can be brokerage firms or financial institutions.

6. Depository Participants (DPs): DPs facilitate the holding and transfer of securities in electronic form. They work with depositories like the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL) to provide dematerialization and rematerialization services for securities.

Question 25. Distinguish between the primary market and the secondary market.
Answer: The following are the Key Differences between the Primary Market and the Secondary Market:

Question 26. Examine the capital market reforms introduced in India.
Answer: The reforms in the capital market are explained below concerning primary and capital markets in India.

Primary Market Reforms in India. Several measures have been taken in India especially since 1991 to develop the primary market in India. These measures are discussed below:

1. Abolition of Controller of Capital Issues: The Capital Issues (Control) Act, of 1947 governed capital issues in India. The capital issues control was administered by the Controller of Capital Issues (CCI). The Narasimham Committee (1991) had recommended the abolition of CCI and wanted SEBI to protect investors and take over the regulatory function of CCI.

• Thus, the government replaced the Capital Issues (Control) Act and abolished the post of CCI. Companies are allowed to approach the capital market without prior government permission subject to getting their offer documents cleared by SEBI.

2. Securities and Exchange Board of India (SEBI): SEBI was set up as a non-statutory body in 1988 and was made a statutory body in January 1992. SEBI has introduced various guidelines for capital issues in the primary market. They are explained below.

3. Disclosure Standards: Companies are required to disclose all material facts and specific risk factors associated with their projects. SEBI has also introduced a code of advertisement for public issues to ensure fair and truthful disclosures.

4. Freedom to Determine the Par Value of Shares: The requirement to issue shares at a par value of Rs.10 and Rs.100 was withdrawn. SEBI has allowed the companies to determine the par value of shares issued by them. SEBI has allowed issues of IPOs through the “book building” process.

5. Underwriting Optional: To reduce the cost of the issue, underwriting by the issuer is made optional. It is subject to the condition that if an issue was not underwritten and was not able to collect 90% of the amount offered to the public, the entire amount collected would be refunded to the investors.

6. Fils Permitted to Operate in the Indian Market: Foreign institutional investors such as mutual funds and pension funds are allowed to invest in equity shares as well as in the debt market, including dated government securities and treasury bills.

7. Accessing Global Funds Market: Indian companies are allowed to access the global finance market and benefit from the lower cost of funds. They have been permitted to raise resources through the issue of American Depository Receipts (ADRs), Global Depository Receipts (GDRs), Foreign Currency Convertible Bonds (FCCBs), and External Commercial Borrowings (ECBs). Indian companies can list their securities on foreign. stock exchanges through ADR./GDR issues.

8. Intermediaries under the Purview of SEBI: Merchant bankers, and other intermediaries such as mutual funds including UTI, portfolio managers, registrars to an issue, share transfer agents, underwriters, debenture trustees, bankers to an issue, custodians of securities, and venture capital funds have been brought under the purview of SEBI.

9. Credit Rating Agencies: Various credit ratings agencies such as Credit Rating Information Services of India Ltd. (CRISIL – 1988), and Investment Information and Credit Rating Agency of India Ltd. (ICRA – 1991). Cost Analysis and Research Ltd. (CARE – 1993) and so on were set up to meet the emerging needs of the capital market.

Secondary Market Reforms

Several measures have been taken by the government and SEBI for the growth of the secondary capital market in India. The important reforms or measures are explained below.

1. Setting up of National Stock Exchange (NSE): NSE was set up in November 1992 and started its operations in 1994. It is sponsored by the IDBI and co-sponsored by other development finance institutions, LIC, GIC, Commercial banks, and other financial institutions.

2. Over the Counter Exchange of India (OTCEI): It was set in 1992. It was promoted by a consortium of leading financial institutions in India including UTI, ICICI, IDBI, IFCI, LIC, and others. It is an electronic national stock exchange listing an entirely new set of companies that will not be listed on other stock exchanges.

3. Disclosure and Investor Protection (DIP) Guidelines for New Issues: To remove inadequacies and systematic deficiencies, to protect the interests of investors and for the orderly growth and development of the securities market, the SEBI has put in place DIP guidelines to govern the new issue activities. Companies issuing capital in the primary market are now required to disclose all material facts and specify risk factors with their projects.

4. Screen-Based Trading: The Indian stock exchanges were modernized in the 90s, with a Computerised Screen-Based Trading System (SBTS). It electronically matches orders on a strict price/time priority. It cuts down time, cost, risk of error, and fraud, and therefore leads to improved operational efficiency.

5. Depository System: A major reform in the Indian Stock Market has been the introduction of a depository system and scripless trading mechanism since 1996. Before this, the trading system was based on the physical transfer of securities.

• A depository is an organization that holds the securities of shareholders in electronic form, transfers securities between account holders, facilitates the transfer of ownership without handling securities, and facilitates their safekeeping.

6. Rolling Settlement: Rolling settlement is an important measure to enhance the efficiency and integrity of the securities market. Under rolling settlement, all trades executed on a trading day are settled after certain days.

7. The National Securities Clearing Corporation Ltd. (NSCL): The NSCL was set up in 1996. It has started guaranteeing all trades in NSE since July 1996. The NSCL is responsible for the post-trade activities of the NSE. Clearing and settlement of trades and risk management are its central functions.

8. Trading in Central Government Securities: To encourage wider participation of all classes of investors, including retail investors, across the country, trading in government securities has been introduced since January 2003. Trading in government securities can be carried out through a nationwide, anonymous, order-driver, screen-based trading system of stock exchanges in the same way in which trading takes place in equities.

9. Mutual Funds: The emergence of diversified mutual funds is one of the most important developments in the Indian capital market. Their main function is to mobilize the savings of the general public and invest them in stock market securities. Mutual funds are an important avenue through which households participate in the securities market.

Stock Market Short Answer Questions

Question 1. What do you mean by securities?
Answer: Securities are claims on money and are like promissory notes or 1.0.U. Securities are a source of funds for companies, Govt. etc. There are two types of sources of funds namely internal and external and securities emerge when funds are raised from external sources.

The issue of securities can be looked at from various angles. These may be set out as follows:

1. From the point of view of issuers, these are the sources of finance for long-term capital investment and for working capital. They can thus invest more than their resources;
2. From the point of view of investors, these are lOUs or promissory notes, giving an income or a return their investment. They provide a channel to their savings and cater to the asset preferences of the public with varying characteristics of risk, income, maturity, etc.;
3. From the point of view of the nation, these issues mobilize the savings for investment and capital formation in the country. They promote the growth of output and income by a multiplier leading to a rise in the output by a multiple of the original investment over some time;
4. From the point of view of financial intermediaries like banks, financial institutions, etc., these issues are a source of income for the management of these issues placing them with the public, providing liquidity and marketability to them, and activating idle funds.

Question 2. Key Indicators of Securities Market.
Answer: The following are the Key Indicators of the Securities Market:

1. Index: An Index is used to give information about the price movements of products in the financial, commodities, or any other markets. Stock market indices are meant to capture the overall behavior of the equity markets.

• The stock market index is created by selecting a group of stocks that are representative of the whole market or a specified sector or segment of the market. The blue-chip index of NSE is CNX Nifty.

2. Market Capitalisation: Market capitalization is defined as the value of all listed shares on the country’s exchanges. It is computed daily. The market capitalization of a particular company on a particular day can be computed as the product of the number of shares outstanding and the closing price of the share. Here the number of outstanding shares refers to the issue size of the stock.

• Market Capitalisation = Closing price of share x Number of outstanding shares.

3. Market Capitalization Ratio: The market capitalization ratio is defined as the market capitalization of stocks divided by GDP. It is used as a measure of stock market size.

4. Turnover: Turnover for a share is computed by multiplying the traded quantity with the price at which the trade takes place. Similarly, to compute the turnover of the companies listed at the Exchange we aggregate the traded value of all the companies traded on the Exchange.

5. Turnover Ratio: The turnover ratio is defined as the total value of shares traded on a country’s stock Exchange for a particular period divided by market capitalization at the end of the period. It is used as a measure of trading activity or liquidity in the stock markets.

• Turnover Ratio = Turnover at Exchange / Market Capitalisation at Exchange.

Question 3. Capital Market.
Answer: The capital market refers to the marketplace where investment funds like bonds, shares, and mortgages are traded.

• The capital market’s primary function is to direct investments from investors with surplus funds to those who are experiencing a shortfall. The capital market provides both overnight and long-term funds.
• The market for securities known as the capital market is where businesses and governments can raise long-term financing. It is a market where loans for terms greater than a year are made.
• Equity instruments, credit market instruments, insurance instruments, foreign currency instruments, hybrid instruments, and derivative instruments are only a few of the capital market instruments utilized for market trade. To profit from their respective markets, investors use these.
• All of these are referred to be capital market instruments because they generate money for businesses, corporations, and occasionally national governments.

Question 4. Primary Market / New Issue Market.
Answer: A primary market is a market for new issues or new financial claims. Hence, it is also called the New Issue market. The primary market deals with those securities which are issued to the public for the first time.

• In the primary market, borrowers exchange new financial securities for long-term funds. Thus, the primary market facilitates capital formation. There are three ways by which a company may raise capital in a primary market.

Features of Primary Markets:

1. This is the market for new long-term equity capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the new issue market (NIM).
2. In a primary issue, the securities are issued by the company directly to investors.
3. The company receives the money and issues new security certificates to the investors.
4. Primary issues are used by companies to set up new businesses or to expand or modernize existing businesses.
5. The primary market performs the crucial function of facilitating capital formation in the economy.

Question 5. Types of issues in Primary Market.
Answer: The types of issues made in the Primary Market are:

1. Public Issue: Securities are issued to the general public and anyone can subscribe to them. Public issue of equity shares can be categorized as follows:

• Initial Public Offer (IPO): An IPO is where the first public offer of shares is made by a company. An IPO can be in the following forms:

1. Fresh Issue of shares where new shares are issued by the company to the public investors. In this kind of issue, the funds of investors will go to the company to be used for the purpose for which the issue is made.
2. Offer for Sale where existing shareholders such as promoters or financial institutions or any other person offer their holding to the public. In this kind of issue, the funds of the investors will go to such sellers of the shares and not to the company.

• Follow-on Public Offer (FPO): It is made by an issuer/ company that has already done an IPO in the past and is making a fresh issue of securities to the public.

2. Preferential Issue: In this mode of issue, securities are issued to an identified set of investors like promoters, strategic investors, employees, etc.

3. Rights Issue: When the Company gives its existing shareholders the right to subscribe to newly issued shares, in proportion to their existing shareholding, it is called a rights issue.

4. Bonus Issue: When the existing shareholders of a company are issued additional shares, in proportion to their existing shareholding and without any additional cost, then it is called a bonus issue.

Question 6. Role of Primary Market.
Answer: The primary market is the medium for raising fresh capital in the form of equity and debt. It mops up resources from the public (investors) and makes them available for meeting the long-term capital requirements of corporate business and industry.

• The primary market brings together the two principal constituents of the market, namely the investors and the seekers of capital.
• The savings or surplus funds with the investors are converted into productive capital to be used by companies for productive purposes. Thus, capital formation takes place in the primary market. The economic growth of a country is possible only through a robust and vibrant primary market.
• In the secondary market, shares already purchased by investors are traded among other investors. Operations in the secondary market do not result in the accretion of capital resources of the country, but indirectly promote savings and investments by providing liquidity to the investments in securities, i.e. the investors have the facility to liquidate their investments in securities in the secondary market.

Question 7. IPO.
Answer: IPO stands for Initial Public Offering which is the process of transforming a privately-held company into a public company. This process also creates an opportunity for smart investors to earn a handsome return on their investments.

When shares are offered to the public for the first time, it is referred to as an IPO or public offering. They are carried out by the new and young companies who are targeting expansion and require capital for the same. Apart from this, IPOs can also be carried out by large companies that require funds for their further expansion.

Question 8. FPO.
Answer: A follow-up public offer or FPO is a way by which companies already listed on the stock exchange issue shares to the public. It is different from an IPO which is when a company offers its shares to the public for the first time.

• A company generally needs a follow-on offering to raise ‘additional capital’ for various reasons and this goal is achieved by conducting a dilutive FPO where new shares are offered and new money is generated.

Types of Follow-On Public Offers:

There are two types of FPOs a company can issue: diluted and non-diluted.

1. Diluted FPO: A diluted FPO is when a company issues new shares of stock, therefore increasing the number of outstanding shares. Companies do this to raise additional capital. With this type of offering, all existing shares are diluted.

2. Non-Diluted FPO: A non-diluted FPO is when a company doesn’t issue new shares of stock, but instead, existing shareholders sell their shares in a public market. In the case of a non-diluted FPO, the proceeds of the sales go to the shareholders who are selling their shares rather than to the company itself. This means it does not result in additional shares for the company.

Question 9. Pricing Methods in IPO.
Answer: There are two types of pricing methods in the IPO

1. Fixed Price
2. Book Building

1. Fixed Price: In this method, the price of the share is fixed and securities are offered at this price. Price is made known to investors in advance. Investors’ Demand for the shares is known only after the issue is being closed. The investors have to pay 100% money on the application of the share.

2. Book Building: Book Building is used in Initial Public Offer (IPO) which helps in price and demand discovery. SEBI introduced this method for greater transparency in price determination which is beneficial to the issuing company as well as to investors. It is more suitable for big issues, though the minimum size is not fixed by SEBI.

• In this method, bids are collected from investors at various prices, which are above or equal to the floor price. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria adopted by the company in consultation with the merchant bankers.

Question 10. IPO Vs. FPO
Answer: 

Question 11. NIFTY.
Answer: The index was built by IIS (India Index Service Ltd) and CRISIL (Credit Rating Information Services of India) along with the strategic Alliance of SOP (Standard Poor Rating Service). It was formed with the following objectives:

• To reflect market movements more accurately
• To provide a tool for measuring portfolio returns in comparison to market returns for fund managers
• To provide a basis for introducing index-based derivatives.

Features of the NIFTY Index:

• The selection criteria for the nifty index are market capitalization and liquidity.
• The NIFTY Index represents 45% of the total market capitalization.
• The impact cost of NIFTY portfolios is less compared to other portfolios.
• It provides the best protection against inflation.
• It is selected for derivative trading

Question 12. Rights issue.
Answer: Publicly listed companies often require additional capital to give shape to their expansion plans, improve debt-to-equity ratio, bring about infrastructural development, or pay off existing debts. In this situation, they may release the rights issue of shares to existing shareholders.

• It is a practical choice, as companies do not require any additional loans from banks at a high interest rate. Instead, they can raise the capital from stock owners without even incurring underwriting fees.
• Here, investors get an opportunity to purchase stocks directly from the company at a discounted price rather than visiting the secondary market. The number of shares that shareholders will own depends on their existing holdings.

Question 13. Secondary Market/Stock Exchange.
Answer: The secondary market is also known as the ‘after-market’. It refers to the financial market to buy and sell financial instruments and securities that have been previously issued. These financial instruments include stock, hands, futures, and options. Other names used for such markets are Stock Market or Stock Exchange Features:

The following are the main features of a secondary market:

1. Stock exchanges engage in formerly issued securities.
2. The beginning of the security does not take place through this source i.e., the Stock exchange.
3. Securities are not allotted directly by the corporation to investors.
4. Securities are traded by the current investors to other investors.
5. The proposing buyer and seller can purchase and sell securities via brokers.

Question 14. Components of the Secondary Market.
Answer: The securities market is classified into the following markets and further different types of instruments are traded in these markets:

1. Cash /Equity Markets: The equity segment allows dealing in shares, debentures, warrants, mutual funds, and ETFs.

2. Equity Derivatives Market: The derivatives segment allows trading in derivative instruments. It is a product whose value is derived from the value of one or more basic variables and is called base (underlying asset, index). The underlying asset can be equity, forex, commodity, or any other asset.

3. Debt Market: The debt market consists of bond markets that provide financing through the issuance of bonds.

4. Corporate Bond Market: Bonds issued by firms are Corporate bonds and are issued to meet needs for expansion, modernization, restructuring operations, mergers, and acquisitions.

5. Forex Market: The foreign exchange market is where currency trading takes place. Currently, the Forex market is one of the largest and most liquid financial markets in the world and includes trading between large banks, central banks, currency, speculators, corporations, governments, and other financial institutions.

6. Commodity Derivatives Market: Commodity markets enable the exchange of raw or, primary products. Raw commodities are traded on standardized commodities exchange in which they are purchased and sold in well-defined contracts. The trading of gold, silver, and agricultural goods is also facilitated under this market.

Question 15. Types of Secondary Market.
Answer: There are two types of secondary markets stock exchanges and over-the-counter markets

1. Stock Exchanges: One will not find direct contact between the seller and the buyer of securities in this type of secondary market. Regulations are in place to ensure the safety of trading. In this case, the exchange is a guarantor, so there is almost no counterparty risk. Exchanges have relatively high transaction costs because of exchange fees and commissions.

2. Over the Counter Markets: Investors trade among themselves on these decentralized markets. In such markets, there is fierce competition to get higher volumes, which leads to price differences between sellers. Due to the one-to-one nature of the transaction, the risk is higher than with exchanges. Examples of OTC markets include foreign exchange.

Question 16. How Secondary Market Work?
Answer: The secondary market is where investors buy and sell previously issued securities. It is important to the economy because it promotes capital formation and provides for price discovery based on the economic laws of supply and demand.

• In addition, it enhances liquidity and, because it is heavily regulated, gives participants a measure of assurance that business can be conducted safely and with a measure of predictability.
• After the securities are issued, they are bought and sold in the secondary market. If you buy newly issued stock from Microsoft, you are buying stock released into the primary market. The money from investors who buy Microsoft’s new stock is used by the company for financing its operations.
• After the issuance of the securities, the investors who initially bought them from Microsoft sell them to investors who want to make a profit. When investors start buying the shares of Microsoft from each other rather than from the company, they are trading in the secondary market.
• The money from buying and selling the shares of Microsoft in the secondary market provided the price is rising, is a gain for investors.
• Microsoft has already received its financing from its equity issue from the investors who purchased the stock directly from the tech giant in the primary market.

Question 17. Stocks.
Answer: Stock refers to 9 fractions of a company’s capital and the word exchange is the place where the securities are purchased or sold. But in actual practice, the term is used in a wider sense.

1. The stock is a mere collection of the shares of a member of a company in a lump sum. When the shares of a member are converted into one fund is known as stock. A public company limited by shares can convert its fully paid-up shares into stock.
2. However, the original issue of stock is not possible. For the conversion of the shares into stock the following conditions are to be fulfilled in this regard:

• The Articles of Association should specify such conversion.
• The company should pass an Ordinary Resolution (OR) in the Annual General Meeting (, AGM) of the company.
• The company shall give notice to the ROC (Registrar of Companies) about the conversion of shares into stock within the prescribed time.

Question 18. Name any six recognized Stock Exchanges in India.
Answer: A stock exchange is a place or platform that hosts a market where buyers and sellers come together to trade for specific hours during business days. The trade could be stocks, commodities, or even currencies.

As per SEBI’s data (as of January 2020), there are about nine exchanges in India but only a few are active and permanent.

1. Bombay Stock Exchange (BSE): BSE is the oldest stock exchange in Asia. It is the first exchange as well.

2. National Stock Exchange (NSE): While NSE is young when compared to BSE, it is still one of the largest exchanges in the country.

3. Multi-Commodity Exchange (MCX): MCX is one of the largest commodity exchanges in the country.

4. National Commodity and Derivates Exchange (NCDEX): NCDEX is another largest commodity exchange in the country that started its operations around the same time as MCX.

5. India International Exchange (India (NX): Relatively new entrant in the exchange market in the country. Opened in January 2017, India INX is India’s first international stock exchange.

6. NSE IFSC: NSE IFSC Limited (NSE International Exchange) incorporated on 29th November 2016, is a wholly-owned subsidiary of the National Stock Exchange (NSE) and is located at the International Financial Services Centre (IFSC), GIFT City in Gujarat.

7. Indian Commodity Exchange (ICEX): ICEX is a commodity derivative exchange in India.

Question 19. Listing of Securities.
Answer: Listing refers to the admission of the security of a public limited company on a recognized stock exchange for trading. Listing of securities is undertaken with the primary objective of providing marketability, liquidity, and transferability to securities.

• After the promulgation of the Companies (Amendment) Act 1988, a listing of securities offered to the public became compulsory. Section 73, of the Companies Act, states that any company intending to offer shares or debentures to the public through the issue of a prospectus should make an application to one or more recognized stock exchanges for permission to be traded in the respective stock exchange.
• After the permission is granted, the company becomes eligible to list its securities on the stock exchanges.

Question 19. Types of Listing of Securities.
Answer: The following are the different types of Listing of Securities:

1. Initial listing: Here, the shares of the company are listed for the first time on a stock exchange.

2. Listing for public Issue: When a company that has listed its shares on a stock exchange comes out with a public issue.

3. Listing for Rights Issue: When the company has already listed its shares. in the stock exchange issues securities to the existing shareholders on a rights basis.

4. Listing of Bonus shares: When a listed company in a stock exchange is capitalizing its profit by issuing bonus shares to the existing shareholders.

5. Listing for merger or amalgamation: When the amalgamated company issues new shares to the shareholders of the amalgamated company, such shares are listed.

Question 20. Secondary Market Intermediaries.
Answer: Different types of Secondary Market Intermediaries are given below:

1. Brokers: A broker is a member of the stock exchange. He buys and sells securities on behalf of outsiders who are not members. He charges brokerage or commission for his services.
2. Jobbers: A jobber is a member of the stock exchange. He buys and sells securities on his behalf. He is specialized in one type of security and he makes profits by selling the securities at a higher price.
3. Bulls: A bull is a speculator who expects a price rise. He buys securities to sell them in the future at a higher price and make a profit out of it.
4. Bears: A bear is a speculator who expects a fall in price. He sells securities which he does not possess.
5. Stag: A stag is also a speculator who applies for new securities in the expectation that the price will rise by the time of allotment and he can sell them at a premium.

Question 21. Private Placement.
Answer: A method of marketing securities whereby the issuer makes the offer of sale to individuals and institutions privately without the issue of a prospectus is known as the Private Placement Method’. This is the most popular method gaining momentum in recent times among corporate enterprises.

Advantages:

1. Less expensive as various types of costs associated with the issue are borne by the issue houses and other intermediaries
2.  Less troublesome for the issuer as there are not much of stock exchange requirements concerning the contents of the prospectus and its publicity, etc. to be complied with.
3. Placement of securities suits the requirements of small companies
4. The method is also resorted to when the stock market is dull and the public response to the issue is doubtful.

Disadvantages:

1. Concentration of securities in a few hands
2. Creating artificial scarcity for the securities thus jacking up the prices temporarily and misleading the general public
3. Depriving the common investors of an opportunity to subscribe to. the issue, thus affecting their confidence levels.

Question 22. Instruments of Secondary Market.
Answer: The following are the main instruments or products dealt in the Secondary Market:

1. Shares: “A share in the share capital of the company and includes stock except where a distinction between stock and share is expressed or implied.” For example, if the capital of the company is 10,000 and is divided into 1000 units of Rs. 10/- each then each unit of Rs.-10/- shall be called a share of the company.

2. Debentures: A debenture is a unit of loan amount. When a company intends to raise the loan amount from the public it issues debentures and the person holding debenture or debentures is called the debenture holder. A debenture holder is the creditor of the company.

• Debentures bear a fixed rate of interest on them and the same is paid on some pre-specified date on half yearly basis. The bond amount is paid on a particular date on the redemption of the bond. Debentures are normally secured against the assets of the company in the favour of the debenture holder.

3. Bonds: A bond is a negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security is generally issued by a company, government agency, or municipality.

4. Mutual Funds: A Mutual Fund can be described as a common pool of money where many small and retail investors put in their money. This money is allocated towards some objective which is predefined.

• Thus it can be said that ownership of the fund is joint or mutual, as this belongs to all those investors who have contributed to it. Ownership of an investor is in the same proportion as the contribution made by him bears to the total pool (amount) of the fund created.

Question 23. Reasons for Listing in IPO.
Answer: The following are the reasons for listing in IPO:

• When a company lists its shares on a public exchange, it will almost invariably look to issue additional new shares to raise extra capital at the same time. The money paid by investors for newly issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors).
• An IPO permits a company to tap a wide pool of stock market investors to provide it with large volumes of capital for future growth. The company is never required to repay the capital, but instead, the new shareholders have a right to future profits distributed by the company and the right to a capital distribution in case of dissolution.
• The existing shareholders will see their shareholdings diluted as a proportion of the company’s shares. However, they hope that the capital investment will make their shareholdings more valuable in absolute terms.
• Once a company is listed, it will be able to issue further shares via a rights issue, thereby again providing itself with capital for expansion without incurring any debt.
• This regular ability to raise large amounts of capital from the general market, rather than having to seek and negotiate with individual investors, is a key incentive for many companies seeking to list.

Question 24. Book Building.
Answer: Book building is a price discovery mechanism based on the bids received at various prices from the investors, for which demand is assessed and then the prices of the securities are discovered.

• In the case of a normal public issue, the price is known in advance to the investors, and the demand is known at the close of the issue.
• In the case of public issues through book building, demand can be known at the end of every day but price is known only at the close of the issue. Book building works on the assumption that the underwriting syndicate estimates demand and takes the allocation on their books, before the sale to an investor who is a retail one.

Question 25. Need for Secondary Market.
Answer: Two basic needs of the investors can be proposed:

1. Need for buying and selling existing securities: Investors who can gather some information about a particular security from the market or from some other sources tend to believe that they have superior information than other market players. They develop this misconception that the security is not correctly priced by the market.

• If the information is good, this suggests that security is currently underpriced and investors who have access to such information will want to buy the security. On the other hand, if the information is bad, the security will be currently overpriced, and such investors will want to sell their securities in the market as soon as possible.

2. Need for liquidity: Investors, who are motivated by the liquidity factor, transact in the secondary market to come out of the position of either excess liquidity or insufficient liquidity. Investors who have surplus funds (For Example. due to ancestral property or some other reason) will buy securities, and investors who have having dearth of funds (For Example. desire to purchase land) will sell securities in the market.

Question 26. Parts of the Secondary Market.
Answer: Secondary Market can be divided into three parts. These are:

1. Equity Market: Shares of a company which are also termed as equities make the person or organisation holding them the shareholder of the company. Most investors prefer to invest in them because equities have a proven track record of outperforming other forms of investments.

• The value of most of the equities tends to increase over time. Dividend is a percentage of the face value of a share that a company returns to the shareholders
  from its annual profits.

2. Debt Market: The debt Market is that part of the secondary market where investors buy and sell debt securities which are mostly in the form of bonds. It is the market where fixed-income securities are issued and traded. For a developing economy like India, debt markets are a crucial source of capital funds.

• Indian Debt Market is almost the third largest in the world and one of the largest in Asia. It includes government securities, public sector undertakings, other government bodies, financial institutions, banks and companies.

3. Derivative Segment: Financial markets are well known for their volatile nature and hence risk factor is an important factor for financial agents. To reduce this concept of derivatives comes into the picture.

• Derivatives are products whose values are derived from one or more basic variables called bases. These bases can be underlying assets (for example forex, equity, etc.) bases or reference rates. Derivatives were introduced in the Indian Stock Market to enable investors to hedge their instruments against adverse volatile price movements.

Stock Market Indices Essay Questions

Questions 1. What is the stock market index? Write the need and purpose of stock market indices.
Answer: A stock market index is a statistical source that measures financial market fluctuations. The indices are performance indicators that indicate the performance of a certain market segment or the market as a whole.

• A stock market index is constructed by choosing equities from similar companies or those that match a predetermined set of criteria. These shares are already listed on the exchange and traded. Share market indexes can be built using a range of variables, including industry, segment, or market capitalization.

Need of Share Price Indices: Share price indices serve several important purposes in the world of finance and investing. These indices provide valuable information and insights to market participants, investors, and policymakers.

Following are the reasons for the need for share price indices:

1. Market Performance Measurement: Share price indices serve as benchmarks to assess the overall performance of a stock market, specific sectors, or individual stocks. They provide a standardized way to measure market movements and trends over time.

2. Investment Performance Evaluation: Investors use indices to gauge the performance of their investment portfolios. By comparing the returns of their investments to a relevant index, investors can assess how well their portfolio has performed.

3. Risk Management: Indices help investors and fund managers manage risk by providing a reference point for market movements. Investors can assess the risk-adjusted returns of their portfolios about an appropriate index.

4. Portfolio Diversification: Share price indices enable investors to diversify their portfolios effectively. By investing in index-tracking funds or exchange-traded funds (ETFs), investors can gain exposure to a broad market segment without individually selecting stocks.

5. Market Trends Identification: Indices help in identifying market trends, cycles, and patterns. Analysts and investors use historical index data to identify long-term trends and make informed predictions about future market movements.

6. Sector Analysis: Sector-specific indices provide insights into the performance of particular industries or sectors of the economy. This information is valuable for investors and analysts looking to understand economic trends and sector dynamics.

7. Comparison of Investment Strategies: Investors can compare the performance of various investment strategies against relevant indices. For example, active fund managers can compare their returns to a benchmark index to assess their performance.

8. Economic Indicators: Share price indices can serve as leading indicators of economic health. If a stock market index is rising, it might indicate positive investor sentiment and economic growth.

9. Market Sentiment: The direction of share price indices can reflect market sentiment. Rising indices can indicate optimism while falling indices might suggest investor concerns.

10. Capital Allocation: Investors use index data to allocate capital to different asset classes, regions, or sectors based on their risk appetite and investment goals.

11. Investor Communication: Share price indices provide a common language for investors, analysts, and financial media to communicate about market performance and trends.

12. Policy Decisions: Policymakers and regulators use indices to monitor market stability, assess the impact of policy changes, and make informed decisions about financial regulations.

13. Benchmarking: Companies and investment managers use indices to benchmark their performance against market standards and competitors.

Purpose of Share Price Indices:

Indices are used across the global markets by financial professionals, institutions, and individuals for the following purposes:

• Stock market indices are the most significant and widely studied parameters in the financial market.
• Investors and traders use the stock market index to analyze the market and manage their investment portfolios.
• Financial institutions use the stock market indices to manage the investment portfolio of clients and draw performance comparisons based on the indices.
• The stock indices indicate the mood and sentiment of the market at a given time. Investors can understand the market’s pattern by looking at the indices and placing profitable buying and selling calls.
• The stock index helps identify profitable stocks and indicates how these stocks have performed compared to their peers.
• Along with stocks, stock market indices show the trend prevailing in different sectors.
• Investors can make passive investments by analyzing the stock indices by choosing index funds that simply mimic the performance of an index.

Question 2. What are Stock Market Indices? Explain the uses and limitations of Stock Market Indices.
Answer: Stock market indices represent a certain group of shares selected based on particular criteria like trading frequency, share size, etc. The stock market uses the sampling technique to represent the market direction and change through an index.

• Stock Market Indices are the barometer of the stock market which mimic. the stock market behavior and help to determine the upward and downward movements in the stock market.

Advantages of Investing in the Stock Market Indices:

Some of the advantages of investing in the stock market index are as follows:

1. Diversification: Stock market indices consist of many stocks, providing investors with diversification across various sectors and industries. This diversification can help reduce overall portfolio risk, as gains in one stock can make up for losses in another one.

2. Low Cost: Investing in a stock market index is typically less expensive than investing in individual stocks. Because index funds and exchange-traded funds (ETFs) have lower fees and expenses. This can help investors keep more of their investment returns.

3. Market Performance: Stock market indices generally reflect the performance of the overall market, which tends to increase over time. As a result, investing in indices can provide investors with exposure to the growth potential of the stock market as a whole, rather than relying on the performance of individual stocks.

4. Benchmarking Performance: Investors and fund managers use stock market indices as benchmarks to assess the performance of their investment portfolios. Comparing the returns of a portfolio to a relevant market index helps gauge how well the investments are performing relative to the broader market.

5. Investment Products: Indices are the basis for various financial products, such as index funds and exchange-traded funds (ETFs). These ‘ investment vehicles replicate the performance of a specific index, allowing investors to gain exposure to a broad market or a specific sector without having to buy individual stocks.

6. Risk Management: Investors use indices to assess the overall risk and volatility of the market. A widely followed index can serve as a proxy for market risk. By understanding the historical volatility of an index, investors can make more informed decisions about the level of risk they are comfortable taking in their portfolios.

7. Sector Analysis: Some indices focus on specific sectors or industries, providing insights into the performance of those particular segments of the market. Investors use sector indices to analyze trends, assess the health of specific industries, and make investment decisions based on sector-specific information.

Disadvantages of Investing in the Stock Market Indices:

1. Limited flexibility: Stock market indices have a pre-determined composition of stocks. Consequently, investors have limited control over the individual stocks in their portfolios. This lack of flexibility can be a disadvantage for investors who prefer a more active approach to investing.

2. Overexposure to certain sectors: Certain sectors may have a larger representation in a particular stock market index. It can lead to overexposure to those sectors. For example, if a particular index has a large weighting towards the technology sector, then investors in that index may get overexposed to the performance of tech companies.

3. Market volatility: Investing in stock market indices can be subject to market volatility and fluctuations. While the long-term trend of the market has historically been upward, short-term fluctuations can be unsettling for investors who are not comfortable with the inherent risk of investing in the stock market.

4. Price-Only Focus: Indices are typically based on stock prices, not total returns. This means they do not account for dividends or other income generated by the stocks in the index. For income-focused investors, this can be a limitation as it does not provide a complete picture of the overall return.

5. Lack of Quality Assessment: Indices often include stocks based on quantitative criteria, such as market capitalization, without a thorough assessment of the quality of the underlying companies. This can lead to the inclusion of overvalued or financially weak companies in the index.

6. Survivorship Bias: Indices are periodically revised to include successful companies and remove struggling ones. This survivorship bias can result in an overestimation of historical performance, as the poor performers are excluded from the index. Investors should be cautious when interpreting long-term historical returns.

Question 3. HOW do interpret share price index numbers?
Answer: Interpreting share price index numbers involves understanding how the index value changes over time and what it signifies in terms of market performance. Here’s how to interpret share price index numbers:

1. Direction of Change: If the index value increases, it indicates that the overall value of the constituent stocks has risen. This suggests a positive market performance.

• If the index value decreases, it signifies a decline in the overall value of the stocks, indicating a negative market performance.

2. Percentage Change: The percentage change in the index value from one period to another indicates the magnitude of the market’s movement. A higher percentage change indicates a more significant shift in market performance.

3. Relative Performance: Investors often compare the performance of individual stocks or portfolios to the index’s performance. If an investor’s portfolio outperforms the index, it suggests strong performance.

4. Trends and Patterns: Analyzing index values over time can reveal trends, cycles, and patterns in the market’s behavior. This can assist in making informed investment decisions.

5. Sector and Industry Analysis: Sector-specific indices can be used to analyze the performance of specific industries. Positive trends in a sector index might suggest a strong industry outlook.

6. Economic Indicators: A rising index might reflect positive investor sentiment and economic growth, while a declining index could indicate economic concerns.

7. Market Sentiment: Index movements can reflect market sentiment. Bullish sentiment is often associated with rising indices, while bearish sentiment is linked to falling indices.

8. Benchmarking and Risk Assessment: Investors and fund managers compare their portfolios’ performance to index performance to assess their risk-adjusted returns and benchmark their strategies.

Question 4. What do you mean by Stock Market Indices? Write the significance/importance of Stock Market Indices.
Answer: A stock market index is a method of measuring a section of the stock market. A stock market index (or just “index) is a number that measures the relative value of a group of stocks.

• As the stocks in this group change value, the index also changes value. If an index goes up by 1% then, that means the total value of the securities which make up the index has gone up by 1% in value.

Significance/Importance of Stock Market Indices:

1. Market Representation: Indices provide a snapshot of the overall market or a specific sector by tracking the performance of a selected group of representative stocks. This representation helps investors gauge the general health and direction of the market.

2. Benchmark for Performance: Indices serve as benchmarks for the overall performance of a stock market or specific sectors within it. Investors use these benchmarks to evaluate the performance of their investment portfolios against the broader market.

3. Investment Strategy: Investors and fund managers use indices as a basis for developing and implementing investment strategies. For example, an investor may choose to replicate the performance of a specific index by investing in a basket of stocks that mirrors the index composition.

4. Risk Management: Indices help in assessing market risk and volatility. By tracking the performance of a diversified set of stocks, indices provide a more stable and comprehensive view of market movements, allowing investors to make more informed decisions about risk management.

5. Market Sentiment: Changes in the values of indices often reflect market sentiment. A rising index can indicate optimism and confidence, while a falling index may suggest concerns or a bearish sentiment. Traders and investors use this information to make decisions about buying or selling assets.

6. Asset Allocation: Asset allocators use indices to guide their decisions on how to distribute investments across different asset classes. Indices provide a reference point for balancing portfolios based on factors such as risk tolerance, investment goals, and market conditions.

7. Financial Products: Many financial products, such as index funds and exchange-traded funds (ETFs), are designed to track the performance of specific indices. These products allow investors to gain exposure to a broad market or sector without having to buy individual stocks.

8. Economic Indicators: Movements in stock market indices can serve as indicators of the overall economic health. A rising market may indicate economic growth and confidence, while a declining market might suggest economic challenges.

9. Global Comparison: Investors often compare the performance of different stock markets or regions using indices. This global perspective helps investors make decisions about international diversification and take advantage of opportunities in various markets.

10. Policy and Regulation: Governments and regulatory bodies often use stock market indices to monitor the health of financial markets. Changes in indices can influence economic policies and regulatory decisions.

Question 5. Write the Advantages and disadvantages of the Stock Market Index.
Answer: A stock market index is a statistical measure that tracks the performance of a group of stocks in a particular market or sector. It provides a snapshot of how a specific set of stocks or the overall market is performing. Stock market indices are usually calculated by taking the weighted average of the prices of a select group of stocks.

Advantages of Stock Market Index:

1. Economic Indicator: Changes in stock indices are often used as indicators of economic health. A rising stock market index is generally associated with economic growth and optimism, while a declining index may suggest economic challenges.

2. Price Discovery Mechanism: The stock market index acts as a price discovery mechanism, reflecting the collective valuation of the included stocks. Investors use this information to make informed decisions about buying or selling.

3. Research Tool: Analysts and researchers use stock market indices to study market trends, conduct economic research, and analyze the performance of various sectors.

4. Investor Confidence: A rising index may boost investor confidence, leading to increased investment and economic activity. Conversely, a falling index may erode confidence and result in more conservative investment behavior.

5. Risk Management: Indices provide a way for investors to manage risk by spreading investments across multiple stocks. This can help reduce the impact of poor-performing stocks on a portfolio.

6. Liquidity: indices often include highly liquid stocks, making it easier for investors to buy and sell shares. This liquidity can be particularly important for institutional investors dealing with large amounts of capital.

7. Basis for Investment Products: Indices are used as the basis for various financial products, such as index funds and exchange-traded funds (ETFs). These investment vehicles allow investors to gain exposure to the entire market or specific sectors without having to buy each stock.

8. Diversification: Indices often include a diverse range of stocks from various sectors. This diversification helps reduce risk because the performance of individual stocks may not have a significant impact on the overall index.

9. Market Trends and Sentiment: Changes in index values can indicate broader market trends. Rising indices may suggest a bullish market, while falling indices may signal a bearish market sentiment.

Disadvantages of Stock Market Index:

1. Market Manipulation: Market manipulation can impact the performance of indices. For example, a few large trades in a heavily weighted stock can disproportionately influence the index. This is a concern, especially in thinly traded markets.

2. Geographical Bias: Global indices may have a bias towards certain geographical regions, potentially neglecting opportunities in other parts of the world. This can limit the global diversification benefits for investors.

3. Dividend Exclusion: Some indices do not account for dividends. Dividends can be a significant component of total returns, and their exclusion may provide an incomplete picture of an investor’s actual performance.

4. No Risk Assessment: Indices do not provide information about the risk associated with individual stocks. Investors need to perform additional analysis to understand the risk profile of the stocks within an index.

5. Past Performance Bias: Indices are backward-looking and reflect historical performance. Just because a stock has performed well in the past doesn’t guarantee future success. Investors should be cautious about assuming that past trends will continue.

6. Limited Diversification: While indices aim to provide diversification, they are still limited by the selection of stocks included. Some sectors or industries may be overrepresented or underrepresented, and certain types of stocks may not be included at all.

Question 6. What is a stock market index? Write the different types of Stock Market Indices in India.
Answer: A stock market index is a statistical source that measures financial market fluctuations. The indices are performance indicators that indicate the performance of a certain market segment or the market as a whole.

• A stock market index is constructed by choosing equities from similar companies or those that match a predetermined set of criteria. These shares are already listed on the exchange and traded. Share market indexes can be built using a range of variables, including industry, segment, or market capitalization.
• Each stock market index tracks the price movement and performance of the stocks that comprise the index.
• This simply means that the success of any stock market index is precisely proportionate to the performance of the index’s constituent stocks. In layman’s words, if the prices of the stocks in an index rise, the index as a whole rises as well.

Types of Stock Market Indices:

1. Sectoral Index: Both the BSE and the NSE have some strong indicators that gauge companies in a given sector. Indices like the S&P BSE Healthcare and NSE Pharma are known to be good indicators of changes in the pharmaceutical sector.

• Another notable example is the S&P BSE PSU and Nifty PSU Bank Indices, which are indices of all listed public sector banks. However, neither exchange is required to have equivalent indexes for all industries, yet this is a key cause in general.

2. Benchmark Index: The Nifty 50 index, which consists of the top 50 best-performing equities, and the BSE Sensex index, which consists of the top 30 best-performing stocks, are indicators of the NSE and the Bombay Stock Exchange, respectively.

• This group of equities is known as a benchmark index since they employ the best standards to regulate the companies they select. As a result, they are regarded as the most reliable source of information about how markets work in general.

3. Market Cap Index: A few indices select companies based on their market capitalization. Market capitalization refers to the stock exchange market value of any publicly traded corporation. Indices such as the S&P BSE and NSE small cap 50 are companies with a lower market capitalization as defined by the Securities Exchange Board of India (SEBI).

4. Other Kinds of Indices: Several additional indices, such as the •S&P BSE 500, NSE 100, and S&P BSE 100, are slightly larger and have a greater number of stocks listed on them.

• Investors may have a low-risk appetite, but Sensex stocks may have a high-risk appetite. Investment portfolios are not designed to fulfill all demands. As a result, investors must remain focused and invest in areas where they feel secure.

Question 7. What are the different methods used in the calculation of stock Indices?
Answer: There are various methods for calculating the stock market index. Some of the major methods to calculate the stock market index are given below:

1. Full Market Capitalisation method: In this method, to determine the scrips weighted in the index, the number of shares outstanding is multiplied by the market price of company shares.

• The share with the highest market capitalization would have a higher weight in the index and would be the most influential in the index. In the end, Market capitalization of all companies will be added and it will be the final value of that index.
• The number of shares outstanding means the total number of shares currently held by all its shareholders, including shares held by institutional investors and restricted shares owned by the company’s officers and insiders. The S&P 500 index in the USA uses this method.
• Full Market Capitalisation = No. of shares outstanding x Market Price of one share

2. Free Float Market Capitalisation method: Free Float is the percentage of shares available in the market for trading. It excludes restricted shares held by the government in the form of strategic investment, shares held by company officers and insiders, shares locked under employee stock option plans,s, etc.

Companies in the index are provided with the free float factors based on their percentage of shares in free float. Free float ranges from 0.05 to 1.0 Value of the index through this method is calculated using the following steps-

1. Free float market Capitalisation using the formula = Total number of free float shares x Market price of each share x Free float factor
2. Add the Market capitalization of all the companies in the index calculated through step 1.
3. Calculate the index value with the help of the following formula.
4. Index Value = (Current Free Float Market Capitalisation of index / Base Free Float Market Capitalisation of index) x Base
5. The Index Value Free float market capitalization method is used by both BSE and NSE.

3. Modified Capitalisation Weighted: This method seeks to reduce the effect of the largest stock in the index which would otherwise dominate the value of the index. This method sets a limit on the percentage weight of the largest stock in the group of stocks. NASDAQ 100 uses this method.

4. Price-weighted Index: In the price-weighted index calculation method, each stock influences the index in proportion to its price per share. The value of the index is calculated by adding the prices of each stock in the index and dividing them by the total number of stocks.

• Stocks with a higher price are given more weight which has a greater influence on the performance of the index. Dow Jones Industrial Average uses this method.

5. Equal Weighing: In this method, the percentage weight of every stock in the index is equal, so, all the stocks have an equal influence on the index value. Kansas City Board of Trade (KCBT) uses this method.

Question 8. What are Sectoral Indices? Illustrate the Sectoral Indices of the NIFTY.
Answer: Sectoral indices provide concise, summaries and comparative data for specific sectors or industries. It enables investors to monitor a stock’s performance against specific sectors. Each trading company operates within a particular economic sector, and businesses that share common products or services will be grouped.

• By classifying firms and the economy, investors may conduct in-depth analyses of how the economy as a whole is operating. Energy, services, healthcare, consumer products, industrial, materials, utilities, technology & communications, and financial are all examples of sector indexes.

Sectoral Indices of the NIFTY: The NSE has established a variety of sectoral indices that reflect the performance of the equities included in each index. All sectoral indices are capped following the information provided under ‘Index features.’

1. NIFTY Auto: The index is intended to reflect the behavior and performance of the automobile sector, which includes manufacturers of automobiles and motorcycles, as well as heavy vehicles, auto ancillaries, and tires. The index comprises a maximum of 15 equities and has a January 1, 2004 base date.

2. NIFTY Bank: The index is intended to capture the behavior and performance of large, liquid banks. The index may contain up to 12 stocks and has a base date of January 1, 2000.

3. NIFTY Consumer Durables: The index is designed to track the performance of companies in the Consumer Durables sector. The index consists of a maximum of 15 stocks and has a base value of 1000 points. The index’s base date is April 1, 2005.

4. NIFTY FMCG: The index is intended to reflect the performance and behavior of Fast-Moving Consumer Goods (FMCG). They are commodities and products that are not durable, are intended for mass consumption, and are readily available off the shelf. The index includes a maximum of fifteen companies.

5. NIFTY IT: The index is intended to reflect the behavior of companies involved in information technology infrastructure, information technology education and software training, networking infrastructure, software development, hardware, and information technology support and maintenance, among other activities. The index included twenty companies. The index’s base value was changed from 1000 to 100 on May 28, 2004.

6. NIFTY Media: The NIFTY Media Index is designed to track the behavior and performance of companies in industries such as media, entertainment, printing, and publishing. The index includes a maximum of fifteen companies.

7. NIFTY Metal: The NIFTY Metal Index is intended to reflect the metals sector’s behavior and performance, including mining. The index may have up to fifteen stocks.

8. NIFTY Oil & Gas: The index is designed to track the performance of companies involved in the oil, gas, and petroleum industries. The index consists of a maximum of 15 stocks and has a base value of 1000 points. The index’s base date Is April 1, 2005,

9. NIFTY Pharma: The NIFTY Pharma Index is intended to reflect the behavior and performance of pharmaceutical manufacturers. The index consists of a maximum of 20 stocks as of September 30, 2021.

10. The NIFTY PSU Bank Index: was created to reflect the behaviour and performance of public sector banks. Effective December 27, 2019, all Public Sector Banks traded on the National Stock Exchange (NSE) (listed and traded or not listed but permitted to trade) are eligible for inclusion in the index, subject to meeting other inclusion requirements, including listing history and trading frequency. The index’s base date is January 1, 2004, and its base value is 1000 points.

11. The NIFTY Private Bank Index: It is intended to reflect the behavior and performance of private sector banks. The index consists of ten stocks, and each company’s weight in the index is limited to 25%. (until March 29, 2019).

12. NIFTY Realty: The NIFTY Realty Index is intended to reflect the behavior and performance of enterprises engaged in developing residential and commercial real estate. The index may contain up to ten stocks.

13. NIFTY Financial Services: The index is aimed to reflect the behavior and performance of the Indian financial industry, including banks, financial institutions, housing finance, non-bank financial companies (NBFCs), insurance, and other financial services firms. The index is limited to a maximum of twenty stocks.

14. NIFTY Financial Services 25/50: This is a new capped version of the NIFTY Financial Services index, with 25 denoting the maximum percentage weight of a single stock and 50 denoting the maximum percent weight of all stocks with an individual weight greater than 5%.

NIFTY Healthcare: The index is intended to reflect healthcare companies’ behavior and performance. The index has a maximum of twenty firms and has a base value of 1000 points, and the index’s base date is April 1, 2005.

Question 9.  Explain the criteria adopted in the selection of scrips for Sensex.
Answer: The BSE Sensitive Index has long been known as the barometer of the daily temperature of Indian bourses. In 1978-79 stock market contained only private sector companies and they were mostly geared to commodity production.

• Hence, a sample of 30 was drawn from them. With time more and more companies private as well as public came into the market.
• Even though the number of scrips in the Sensex basket remained the same at 30, representations were given to new industrial sectors such as services, telecom, consumer goods, and 2 and 3-wheeler auto sectors.

Criteria for selection of scrips for BSE Sensex;

1. Industry representation: The index should be able to capture the macro-industrial situation through price movements of individual scrips. The company’s scrip should reflect the present state of the industry and its prospects. Companies chosen should be representative of the industry. For example, a company like ACC in the Sensex is a representative of the cement industry.

• The logic here is that ACC reflects the fortunes of the cement industry that in turn is discounted by the market in the scrip’s pricing. Care is taken in selecting scrips across all the major industries to make the index act as a real barometer of the economy.

2. Market capitalization: The market capitalization of the stock indicates the true value of the stock, as the outstanding number of shares is multiplied by the price. Price indicates the demand and growth potential for the stock. The outstanding shares depend on the equity base. The selected scrip should have a wide equity base too.

3. Liquidity: The liquidity factor is based on the average number of deals of a scrip. The average number of deals in the two previous years is taken into account. The market fancy for the share can be found out by the trading volumes. The Financial Express Equity Index is weighted by trading volume and not by market capitalization.

4. The market depth: The market depth factor is the average deal as a percentage of the company’s shares outstanding. The market depth depends upon the wide equity base. If the equity base is broad based then the number of deals in the market would increase. For example, Reliance Industries has a wide equity base and a larger number of outstanding shares.

5. Floating stock depth: The floating depth factor is the average number of deals as a percentage of floating stock. Low floating stock may get overpriced because the simple law of demand and supply applies here. For example, MRF with its low floating stock can command a high price.

It’s sound finance and internal generation of funds-led growth may be the reason for the low flotation. Though the public holding is fairly high at around 40 percent due to a small equity of Rs. 4.24 Cr, the free float of the company stock is low.

Trading volumes are directly linked to the public holding in the equity of the company. Wide public holding is a prerequisite for high trading volume. Reliance Industries is a good example. The free float of the company is 45 percent and it has a positive effect on the trading volume.

Question 10. Explain the stock selection criteria adopted in the NSE-Nifty.
Answer: The NSE-50 Index is built by India Index Services Product Ltd (IISL) and Credit Rating Information Services of India Ltd.(CRISIL). The NSE-50 index was introduced on April 22, 1996, with the objectives given below:

• Reflecting market movement more accurately
• Providing fund managers with a tool for measuring portfolio returns and market returns.
• Serving as a basis for introducing index-based derivatives.
• Nifty replaced the earlier NSE-100 index, which was established as an interim measure till the time the automated trading system stabilized.

Selection criteria: The selection criteria are the market capitalization and liquidity. The selection criterion for the index was applied to the entire universe of securities admitted to NSE.

• Thus, the sample set covers a large number of industry groups and includes equities of more than 1200 companies.
• The market capitalization of the companies should be Rs. 5 billion (US $ 118 Million) or more. The selected securities are given weights in proportion to their market capitalization.

Liquidity (Impact cost): Here liquidity is defined as the cost of executing a transaction in a security in proportion to the weightage of its market capitalization as against the index market capitalization at any point in time.

• This is calculated by finding out the percentage markup suffered while buying/selling the desired quantity of security compared to its ideal price (best buy + best sell)/2

To buy 2500

\(\text { Ideal price }=\frac{90+91}{2}=90.5\)

Actual buy price \(=\frac{(2000 \times 91)+(500+94)}{2500}\)

⇒ \(=\frac{1,82,000+47,000}{2500}=91.6\)

Impact cost for 2500 shares \(=\frac{91.6-90.5}{90.5} \times 100=1.21\)

• The impact cost for the selling price also can be calculated. The company scrip should be traded for 85% of the trading days at an impact cost of less than 1.5%

2. Base period: The base period for the S & P. CNX Nifty index is the closing prices on November 3, 1995. The base period is selected to commensurate the completion of one year of operation of NSE in the stock market. The base value of the index is fixed at 1000 with a base capital of Rs. 2.06 trillion. Its unique features are:

• S & P. CNX Nifty provides an effective hedge against risk. The effectiveness of hedging was compared with several portfolios that consist of small-cap, madcap, and large-cap companies and found to be higher.
• The index represents 45 percent of the total market capitalization.
• The impact cost of S & P. NCX Nifty portfolio is less compared with other portfolios.
• The nifty index is chosen for derivative trading.

Question 11. ‘Stock market indices are the barometers of the stock market’- Discuss.
Answer: A stock market index is a barometer of market behavior. It measures overall market sentiment through a set of stocks that are representative of the market. It reflects market direction and indicates day-to-day fluctuations in stock prices.

• An ideal index must represent changes in the prices of securities and reflect price movements of typical shares for better market representation. In the Indian markets the BSE, SENSEX, and NSE, NIFTY are important indices.
• A stock exchange does not indicate the fluctuating prices of all the companies in the country. It only includes best stocks which represent a portion of the overall market. Generally, stocks of a company that performs best in its industry are selected.
• The parameter to select the best company from a particular industry can be the size of the company, market capitalization, performance growth, or some other basis.
• For Example, on the Bombay Stock Exchange, there are two pharmaceutical companies, namely Cipla Ltd. and Dr Reddy’s Laboratories Ltd. These two companies are the best performers in that industry.
• It is not necessarily fixed that once a company is included in a stock index then it can’t be removed. The composition of a stock exchange alters as per the performance of companies. Stock Exchange may remove a bad-performing company and can add a well-performing new company.

1. Representation of Market Performance: Stock market indices are designed to represent the performance of a group of stocks that are listed on a particular exchange. In India, popular indices include the Bombay Stock Exchange (BSE) Sensex and the National Stock Exchange (NSE) Nifty. These indices typically consist of large, well-established companies that are considered representative of the overall market.

2. Indicator of Economic Health: Stock market indices are often seen as indicators of broader economic health. In India, for example, a rising stock market may be interpreted as a positive signal for the economy, suggesting that investors have confidence in the growth prospects of businesses. Conversely, a declining market may indicate concerns about economic challenges.

3. Investor Sentiment: Stock indices reflect the collective sentiment of investors. If the market indices are rising, it may indicate optimism and confidence among investors. On the other hand, a falling index may suggest pessimism and concern. Changes in investor sentiment can impact buying and selling decisions, influencing overall market trends.

4. Benchmark for Investment Performance: Investors and fund managers often use stock market indices as benchmarks to assess the performance of their investments. If a mutual fund or portfolio consistently outperforms the benchmark index, it is considered a positive sign, while underperformance may raise concerns.

5. Liquidity and Market Depth: Stock market indices also provide insights into the liquidity and depth of the market. Higher market capitalization and trading volumes of the constituent stocks contribute to the overall stability and reliability of the index as a barometer.

6. Policy Impact: Changes in government policies, economic reforms, and other macroeconomic factors can influence stock market indices. Investors and analysts closely watch indices for signs of how policy changes might impact various sectors and industries.

7. Global Connectivity: In an era of globalized financial markets, movements in Indian indices are often correlated with global indices. Global events and trends can impact Indian markets, making indices crucial for understanding the interconnectedness of the Indian market with the global economy.

Question 12. Define Derivative. Write the Features of financial derivatives.
Answer: The term “Derivative” indicates that it has no independent value, its value is entirely derived from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, livestock, or anything else.

• In other words, derivative means forward, futures, option, or any other hybrid contract of predetermined fixed duration, linked for contract fulfillment to the value of a specified real or financial asset or an index of securities

Features of financial derivatives:

1. It is a contract: Derivative is defined as the future contract between two parties. It means there must be a contract binding on the underlying parties and the same to be fulfilled in the future. The future period may be short or long depending upon the nature of the contract, for example, short-term interest rate futures and long-term interest rate futures contracts.

2. Derives value from underlying asset: Normally, the derivative instruments have a value that is derived from the values of other underlying assets, such as agricultural commodities, metals, financial assets, intangible assets, etc.

• The value of derivatives depends upon the value of the underlying instrument which changes as per the changes in the underlying assets, and sometimes, it may be nil or zero. Hence, they are closely related.

3. Specified obligation: In general, the counterparties have specified obligations under the derivative contract. The nature of the obligation would be different as per the type of the instrument of a derivative. For example, the obligation of the counterparties, under the different derivatives, such as forward contract, futures contract, option contract, and swap contract would be different.

4. Direct or exchange-traded: The derivatives contracts can be undertaken directly between the two parties or through a particular exchange like financial futures contracts.

• The exchange-traded derivatives are quite liquid and have low transaction costs in comparison to tailor-made contracts. Examples of exchange-traded derivatives are Dow Jones, S&P 500, Nikki 225, NIFTY option, and S&P Junior which are traded on the New York Stock Exchange, Tokyo Stock Exchange, National Stock Exchange, Bombay Stock Exchange, and so on.

5. Related to notional amount: In general, the financial derivatives are carried off-balance sheet. The size of the derivative contract depends upon its notional amount. The notional amount is the amount used to calculate the payoff.

• For instance, in the option contract, the potential loss and potential payoff, both may be different from the value of underlying shares, because the payoff of derivative products differs from the payoff that their notional amount might suggest.

6. Delivery of underlying assets not involved: Usually, in derivatives trading, the taking or making of delivery of underlying assets is not involved, rather underlying transactions are mostly settled by taking offsetting positions in the derivatives themselves. There is, therefore, no effective limit on the quantity of claims, which can be traded in respect of underlying assets.

7. May be used as deferred delivery. Derivatives are also known as deferred delivery or deferred payment instruments. It means that it is easier to take short or long positions in derivatives in comparison to other assets or securities. Further, it is possible to combine them to match specific, i.e., they are more easily amenable to financial engineering.

8. Secondary market instruments: Derivatives are mostly secondary market instruments and have little usefulness in mobilizing fresh capital by the corporate world, however, warrants and convertibles are exceptions in this respect.

9. risk exposure: Although in the market, the standardized, general, and exchange-traded derivatives are being increasingly evolved, however, still there are so many privately negotiated customized, over-the-counter (OTC) traded derivatives in existence. They expose the trading parties to operational risk, counter-party risk, and legal risk. Further, there may also be uncertainty about the regulatory status of such derivatives.

10. Off-balance sheet item: Finally, the derivative instruments, sometimes, because of their off-balance sheet nature, can be used to clear up the balance sheet. For example, a fund manager who is restricted from taking a particular currency can buy a structured note whose coupon is tied to the performance of a particular currency pair.

Question 13. Elucidate the different types of Financial Derivatives.
Answer: Derivatives are of two types: Financial And Commodities

• One form of classification of derivative instruments is between commodity derivatives and financial derivatives.
• The basic difference between these is the nature of the underlying instrument or asset. In a commodity derivative, the underlying instrument is a commodity which may be wheat, cotton, pepper, sugar, jute, turmeric, corn, soybeans, crude oil, natural gas, gold, silver, copper, and so on.
• In a financial derivative, the underlying instrument may be treasury bills, stocks, bonds, foreign exchange, stock index, gilt-edged securities, cost of living index, etc.

The most commonly used derivatives contracts are forwards, futures, and options:

1. Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today’s pre-agreed price.

• For example, an Indian car manufacturer buys auto parts from a Japanese car maker with a payment of one million yen due in 60 days.
• The importer in India is short of yen and supposed the present price of the yen is Rs. 68. Over the next 60 days, the yen may rise to Rs. 70. The importer can hedge this exchange risk by negotiating a 60 days forward contract with a bank for Rs. 70.
• According to a forward contract, in 60 days the bank will give the importer one million yen and the importer will give the bank 70 million rupees to the bank.

2. Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts.

• A speculator expects an increase in the price of gold from current future prices of Rs. 9000 per 10 gm. The market lot is 1 kg and he buys one lot of future gold (9000 x 100) for Rs. 9,00,000.
• Assuming that there is a 10% margin money requirement and a 10%increase occurs in the price of gold, the value of the transaction will also increase i.e. Rs. 9900 per 10 gm and the total value will be Rs. 9,90,000. In other words, the speculator earns Rs. 90,000.

3. Options: Options are of two types- calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.

4. Warrants: Options generally have lives of up to one year, the majority of options traded on options exchanges have a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over the counter.

5. Leaps: The acronym LEAPS means long-term equity anticipation securities. These are options having a maturity of up to three years.

6. Baskets: Basket options are options on portfolios of underlying assets. The index options are a form of basket options.

7. Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are:

8. Interest rate swaps: These entail swapping only the interest-related cash flows between the parties in the same currency

9. Currency Swaps: These entail swapping both principal and interest on different currencies than those in the opposite direction.

10. Swaptions: Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaptions is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating.

Question 14. What are Derivatives? Describe the uses and limitations of Derivatives.
Answer: Derivatives are financial instruments whose pay-off is derived from some other underlying asset. Derivatives are designed for hedging, speculation, or arbitrage purposes.

• Derivative securities are the outcome of future and forward markets, where the buying and selling of securities take place in advance but on future dates. This is done to mitigate the risk arising out of the future price movements.

Uses of derivatives:

Derivatives are supposed to provide the following services:

1. Risk aversion tools: One of the most important services provided by the derivatives is to control, avoid, shift, and manage efficiently different types of risks through various strategies like hedging, arbitraging, spreading, etc.

• Derivatives assist the holders to shift or modify suitably the risk characteristics of their portfolios.
• These are specifically useful in highly volatile financial market conditions like erratic trading, highly flexible interest rates, volatile exchange rates, and monetary chaos.

2. Prediction of future prices: Derivatives serve as barometers of the future trends in prices which result in the discovery of new prices both on the spot and futures markets.

• Further, they help in disseminating different information regarding the futures markets trading of various commodities and securities to the society which enables them to discover or form suitable or correct or true equilibrium prices in the markets.
• As a result, they assist in the appropriate and superior allocation of resources in society.

3. Enhance liquidity: In derivatives trading no immediate full amount of the transaction is required since most of them are based on margin trading. As a result, a large number of traders, and speculators arbitrageurs operate in such markets. So, derivatives trading enhances liquidity and reduces transaction costs in the markets for underlying assets

4. Assist investors: The derivatives assist the investors, traders, and managers of large pools of funds to devise such strategies so that they may make proper asset allocation increase their yields, and achieve other investment goals.

5. Integration of price structure: It has been observed from the derivatives trading in the market that the derivatives have smoothed out Price fluctuations, squeezed the price spread, integrated price structure at different points of time, and removed gluts and shortages in the markets.

6. Catalyze growth of financial markets: Derivatives trading encourages competitive trading in the markets and different risk-taking preferences of the market operators like speculators, hedgers, traders, arbitrageurs, etc. resulting in an increase in trading volume in the country. They also attract young investors, professionals, and other experts who will act as catalysts to the growth of financial markets.

7. Brings perfection to the market: Lastly, it is observed that derivatives trading develops the market towards ‘complete markets’. The complete market concept refers to that situation where no particular investors can be better off than others, or patterns of returns of all additional securities are spanned by the already existing securities in it, or there is no further scope of additional security.

Limitations of Derivatives:

1. Risk of Loss: While derivatives can be used to manage risk, they also carry their risks. Leverage inherent in many derivative contracts can amplify losses, potentially leading to significant financial losses.

2. Complexity: Derivatives can be complex financial instruments that require a deep understanding of underlying markets, contract terms, and potential risks. A lack of understanding can lead to costly mistakes.

3. Counterparty Risk: In derivative transactions, there is a risk that one of the parties involved might default on their obligations. This is known as counterparty risk and can lead to financial losses for the other party.

4. Regulatory and Legal Risks: Derivatives are subject to various regulations and legal requirements. Failure to comply with these regulations can result in legal and financial consequences.

5. Market Volatility: Derivative markets can be highly volatile, which can lead to unexpected price movements. Sudden and extreme price fluctuations can result in losses for traders and investors.

6. Market Manipulation: In some cases, derivative markets can be susceptible to manipulation and fraudulent activities, which can distort prices and impact fair market functioning.

7. Overdependence on Derivatives: Relying heavily on derivatives for risk management and speculation can expose individuals and institutions to significant risks if market conditions change unexpectedly

Question 15. Explain the Functions of derivatives markets.
Answer: The derivatives market is a financial market where financial instruments known as derivatives are traded.

• Derivatives derive their value from an underlying asset, index, or rate, and their value is based on the expected future price movements of the underlying asset.
• These instruments are used for various purposes, including hedging against price fluctuations, speculating on future price movements, and achieving portfolio diversification.

Functions of derivatives markets: The following functions are performed by derivative markets:

1. Discovery of price: Prices in an organized derivatives market reflect the perception of market participants about the future and lead the prices of underlying assets to the perceived future level.

• The prices of derivatives converge with the prices of the underlying at the expiration of the derivative contract. Thus derivatives help in the discovery of future as well as current prices.

2. Risk transfer: The derivatives market helps to transfer risks from those who have them but may not like them to those who have an appetite for them.

3. Linked to cash markets: Derivatives, due to their inherent nature, are linked to the underlying cash markets. With the introduction of derivatives, the underlying market witnesses higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk.

4. Check on speculation: Speculation traders shift to a more controlled environment of the derivatives market. In the absence of an organized derivatives market, speculators trade in the underlying cash markets. Managing, monitoring and surveillance of the activities of various participants become extremely difficult in these kinds of mixed markets.

5. Encourages entrepreneurship: An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. Derivatives have a history of attracting many bright, creative, well-educated people with an entrepreneurial attitude.

• They often energize others to create new businesses, new products, and new employment opportunities, the benefits of which are immense.

6. Increases savings and investments: Derivatives markets help increase savings and investment in the long run. The transfer of risk enables market participants to expand their volume of activity.

Question 16. What are the Factors -responsible for the growth of Financial Derivative markets in India?
Answer: There are a large number of factors that contribute to the growth of financial derivative markets in India. All such factors may be classified into environmental factors and internal factors.

Environmental factors: Environmental factors contribute to the growth of financial derivative markets in India.

The following are the environmental factors

1. Price volatility: It refers to rapid changes in the prices of assets in the financial markets over a short period.

2. Globalisation of markets: Globalization has increased the size of markets. This has exposed the modern businesses to greater risk. Increased size has also led to greater use of debt in capital structures. This has contributed to an increase in the financial risks of firms.

3. Technological advances: Technological advances have also motivated the financial derivative markets. Technological advances involve computer and internet technologies. These developments encouraged not only the modeling and design of complex financial deals and instruments but also facilitated trading in them on a 24*7 time frame

4. Regulatory changes: Much of the financial derivative market activity in recent years in India has been fostered by an atmosphere of deregulation of the financial sector. Deregulation has increased competition and forced industries to become competitive.

Internal factors: The following are internal factors that have contributed to the growth of financial derivative markets in India.

1. Liquidity needs: Business firms have liquidity needs. Many of the financial innovations pioneered in the recent past have targeted these needs.

2. Risk aversion: Most of the investors would like to avoid risks. Derivative instruments are useful for avoiding risk.

3. Risk executives: increased risk perceptions of corporate organizations promoted to recruit personnel with risk management training. Most big and medium enterprises maintain risk management teams.

Question 17. Explain the Stock market derivatives in India.
Answer: In India, derivatives are traded on organized exchanges as well as on OTC markets. Derivatives in financial securities were introduced in the National Stock Exchange (NSE) AND THE Bombay Stock Exchange (BSE) in 2000.

• Commodity derivatives were introduced in the year 2003 with the establishment of the multi-commodity exchange, the National Multi-commodity Exchange, and the National Commodity and Derivatives Exchange Ltd.

Let us examine the important stock market derivatives in India.

1. Index futures: The first derivative product traded on the BSE and NSE was index futures. This was introduced in 2000.

• Index futures at NSE: NSE is now one of the prominent exchanges amongst all emerging markets, in terms of equity derivatives turnover. The index futures trading at NSE commenced on 12/06/2000 on the S&P CNX Nifty index.
• Index futures at BSE: The index futures trading at BSE commenced on 09/06/2000 on BSE sense over some time (2000-2012) many indices have been made available for index futures trading.

2. Stock futures or Futures on individual securities: Futures on individual securities were introduced in November 2001. These are cash-settled. These do not involve the delivery of the underlying assets. Today, the most preferred product on the exchanges is single stock futures. This accounts for 55% of total volume.

3. Index options: Index options are financial derivatives based on stock indices such as the S&P 500 or the Dow Jones Industrial Average. Index options give the investor the right to buy or sell the underlying stock index for a defined period.

• Since index options are based on a large basket of stocks in the index, investors can easily diversify their portfolios by trading them. Index options are cash settled when exercised, as opposed to options on single stocks where the underlying stock is transferred when exercised.
• Index options at NSE: The index options were allowed for trading on the S&P CNXnifty index on June 4, 2001. Since its inception, index options at NSE have been growing in the overall equity derivative market.
• Index options at BSE: BSE commenced trading in index options on Sensex on June 1, 2001. BSE launched the Chhota (mini) Sensex on June 1, 2008. With a small or mini market lot of 5, it allows, for comparatively lower capital outlay, lower trading cost, more precise hedging, and flexible trading.

4. Stock options or options on individual securities: Options on individual securities were introduced in July 2001. These are cash-settled. These do not involve the physical delivery of the underlying asset. Other derivatives in India

• Apart from the futures and options on stock indices and individual stocks, there are some other derivatives in India.

Such derivatives may be briefly discussed below.

1. Commodity derivatives: The Forward Contract Regulation Act governs commodity derivatives in the country. The FCRA specifically prohibits OTC commodity derivatives, therefore, at present, India trades only exchange-traded commodity futures.

2. Interest rate derivatives: The NSE launched short-term and long-term interest rate futures in June 2003. However, the trading activity in interest rate futures was very thin. The major reason for this low volume of trading in interest rate futures is the existence of a well-developed OTC market for interest rate swaps and forward rate agreements.

3. Currency derivatives: India has been trading forward contracts in currency, for the last several years. Recently, the Reserve Bank of India has also allowed options in the over-the-counter market. The OTC currency market in the country is considerably large and well-developed.

4. Credit derivatives: Since 2003, the RBI has been looking into the introduction of credit derivatives, and on May 17, 2007, it allowed banks to enter into single-entity credit default swaps. Credit derivatives allow lenders to buy protection against default by borrowers. It is the transfer of the credit risk from one party to another without transferring the underlying.

5. Weather derivatives: SEBI is planning to allow trading in weather derivatives. It is a financial instrument to reduce the risk associated with adverse or unexpected weather conditions, For Example in the agriculture sector. Weather derivative was pioneered by Enron in the US in 1997.

Question 18. Define Commodity Market. Write its features and functions.
Answer: A commodity market is a marketplace that facilitates the exchange of goods for immediate deliveries between the country’s residents.

• The commodity market is a financial market where people buy and sell commodities like agro-products, metals, energy, and other raw materials.
• Producers and consumers of commodities use commodity markets to control price risk and figure out prices. To put it more simply, it is a place where people can buy and sell goods.
• The physical market and the derivatives market are the two kinds of commodity markets. In the physical market, real goods are traded.
• In the derivatives market, contracts are traded that show a deal to buy or sell a specific good at a certain time in the future.

Features of Commodity Markets: Commodity markets have several features that distinguish them from other financial markets.

Here are some of the key features of commodity markets:

1. Standardization: Commodities traded in the market are standardized. This means that the quality, quantity, and delivery date of the commodity are predetermined and specified in the contract. Standardization enables buyers and sellers to trade transparently and efficiently.

2. Price discovery: Commodity markets facilitate price discovery, which is the process of determining the market value of a commodity. The price of a commodity is determined by the forces of supply and demand in the market. Price discovery helps producers and consumers of commodities to determine the fair value of the commodity.

3. Low transaction costs: Commodity markets have low transaction costs compared to other financial markets. This is because commodities are physical assets that do not require complex financial instruments for trading. As a result, transaction costs such as brokerage fees and commissions are relatively low.

4. Leverage: Commodity markets provide leverage to traders. This means that traders can buy or sell a larger quantity of commodities with a smaller amount of capital. Leverage allows traders to amplify their gains or losses.

5. Volatility: Commodity markets are volatile. The prices of commodities are influenced by a variety of factors such as weather conditions, geopolitical events, and supply and demand dynamics. As a result, commodity prices can fluctuate rapidly and unpredictably.

6. Hedging: Commodity markets provide a mechanism for hedging against price risk. Producers and consumers of commodities can use futures contracts to lock in a price for the commodity and protect themselves against price fluctuations in the physical market.

7. Speculation: Commodity markets also attract speculators who seek to profit from price changes in the market. Speculators are traders who do not have an underlying interest in the physical commodity but trade futures contracts for profit.

Functions of Commodity Markets: The commodity market serves several functions that are important to the economy and to market participants.

The following are the key functions of commodity markets:

1. Price discovery: One of the primary functions of commodity markets is to facilitate price discovery. Commodity prices are determined by the forces of supply and demand in the market. Through the trading of commodities on the exchange, buyers and sellers can determine the fair value of the commodity.

2. Risk management: Commodity markets provide a mechanism for managing price risk. Producers and consumers of commodities can use futures contracts to lock in a price for the commodity and protect themselves against price fluctuations in the physical market. This is known as hedging and it enables market participants to manage risk and plan their operations more effectively.

3. Price stabilization: Commodity markets can help stabilize commodity prices. By providing a platform for trading commodities, the market can balance the supply and demand of commodities. In periods of excess supply, traders can sell their commodities on the exchange, which can help bring down prices. Similarly, in periods of shortage, traders can buy commodities on the exchange, which can help support prices.

4. Liquidity: Commodity markets provide liquidity to market participants. This means that traders can buy or sell commodities at any time during the trading hours of the exchange. The availability of liquidity helps to ensure that market participants can trade their commodities quickly and easily.

5. Investment: Commodity markets provide an investment opportunity to investors. Investors can invest in commodities by buying and selling futures contracts or by investing in commodity exchange-traded funds (ETFs). Investing in commodities can provide diversification benefits to an investor’s portfolio.

6. Market information: Commodity markets provide market information to participants. The exchange publishes information about commodity prices, trading volumes, open interest, and other market data. This information can be used by market participants to make informed trading decisions.

Question 19. What is a commodity market? Write the advantages and
Answer: A commodity market is a platform for exchanging primary goods or raw materials, encompassing items like gold, silver, crude oil, agricultural products, and base metals.

• This marketplace facilitates the buying and selling of these commodities through cash or futures contracts.
• Essentially, these markets act as a vital intermediary between commodity producers and consumers. They provide producers with a means to sell their goods and safeguard against price fluctuations, while consumers can acquire the needed products at optimal prices.

Advantages of Commodity Trading:

1. Diversification: Commodities introduce diversification to investment portfolios, reducing overall risk exposure. Their performance often differs from traditional assets like stocks and bonds, acting as a buffer during market volatility.

2. Inflation Hedge: As commodities tend to rise in value during inflation, they serve as a safeguard against currency depreciation. Investors seek commodities to preserve purchasing power.

3. Global Demand Influence: Commodities’ prices can surge due to geopolitical events, natural disasters, or supply disruptions, providing lucrative opportunities for investors.

4. Profit Potential: Trading commodities allows investors to profit from both rising and falling markets, thanks to options like futures and options contracts.

5. Liquidity: Many commodity markets are highly liquid, meaning there is a high volume of trading activity. This liquidity can make it easier for investors to buy or sell commodities without significantly impacting their prices, it also allows for quick entry and exit from positions.

6. Potential Returns: Several factors affect the prices of individual commodities such as supply and demand, inflation, and economy. Due to massive global infrastructure projects, demand has increased in the global infrastructure projects that impact commodity prices. A positive impact on the company stocks affects commodity prices.

7. Transparency in the Process: Trading is a transparent process in commodity futures that allows a fair price that is controlled by large-scale participation. It reflects different perspectives of a large number of people who deal with the commodity.

8. Profitable Returns: Commodities become riskier in the form of investments if the liquidity is high. This means that companies can experience both huge profits and heavy losses.

9. Cushioning against market fluctuations; Money requirement to buy commodity goods if the rupee’ becomes less valuable. During inflation, investors sell off stocks and bonds for investment in commodities. This leads to an increase in the prices of commodity goods. You can only benefit from commodities that act as a hedge against market risks.

10. Trading on Lower Margin: Traders can deposit 5 to 10% of the total contract value as a margin with the broker. This is less in comparison with other asset classes. Low margins allow individuals to invest and take larger positions at lesser capital.

Disadvantages of the Commodity Trading:

1. Price Volatility: Commodities can experience rapid price swings due to external factors, potentially leading to substantial gains or losses for traders.

2. Lack of Income: Unlike dividend-paying stocks or interest¬bearing bonds, commodities do not provide regular income, making them more suitable for capital appreciation.

3. Limited Knowledge: Successful commodity trade demands specialized knowledge of specific markets, often requiring diligent research and analysis.

4. Market Complexity: Derivative trading, such as futures and options, can be intricate and necessitates understanding contract terms and market dynamics.

5. High Risk: Trading in some commodities like crude oil requires a high risk-bearing capacity. The commodity market comes with its own set of risks; therefore it is very important to have a risk profile evaluated before entering the world of commodity trading.

Question 20. What is meant by Currency Market/’Foreign Exchange Market’? What are its Characteristics?
Answer: A market for the purchase and sale of foreign currencies is called a ‘foreign exchange market’. The purpose of such a market is to facilitate international trade and investments. The need for a foreign exchange market arises because of the presence of different international currencies such as the US dollar, UK-pound sterling, European, Japanese-Yen, etc., and the need for trading in such currencies.

Definition: According to Kindleberger, a “Foreign exchange market is a place where foreign money is bought and sold”.

Characteristics of Foreign Exchange Market: Some of the important features of a foreign exchange market are as follows:

1. Electronic Market: The Foreign Exchange market is described as the OTC (Over the Counter) market as there is no physical place where the participants meet to execute the deals. It means the foreign exchange market does not have a physical place.

• It is a market whereby trading in foreign currencies takes place through the electronically linked network of banks, foreign exchange brokers, and dealers whose function is to bring together buyers and sellers of foreign exchange.

2. Geographical spreading: A feature of the foreign exchange market is that it is not to be found in one place. The market is vastly dispersed throughout the leading financial centers of the world such as London, New York, Amsterdam, Tokyo, Hong Kong Toronto, and other cities.

3. Transfer of purchasing power: The foreign exchange market aims at permitting the transfer of purchasing power denominated in one currency to another whereby one currency is traded for another currency. For example – an Indian exporter sells software to a U.S. firm for dollars and a U.S. firm sells supercomputers to an Indian Company for rupees.

• In these transactions, firms of respective countries would like to have their payment settled in their currencies i.e. Indian firm in rupees and U.S. firm in U.S. dollars. It is the foreign exchange market, which facilitates such a settlement between countries in their respective currency units.

4. Intermediary: Foreign exchange markets provide a convenient way of converting the currencies earned into currencies wanted by their respective countries. For this purpose, the market acts as an intermediary between buyers and sellers of foreign exchange.

5. Volume: A special feature of the foreign exchange market is that out of the trading transactions that take place in the foreign exchange market, around 95% takes the firm of cross-border purchase and sale of assets, that is, international capital flows. Only around 5% relates to the export and import activities.

6. Provision of credit: A foreign exchange market provides credit through specialized instruments such as bankers’ acceptance and letters of credit. The credit thus provided is of much help to the traders and businessmen in the international market.

7. Minimizing risks: The foreign exchange market helps the importer and exporter in foreign trade to minimize their risks of trade. This is being done through the provision of ‘Hedging’ facilities.

• This enables traders to transact business in the international market to earn a normal business profit without exposure to an expected change in anticipated profit. This is because exchange rates suddenly change.

8. 24-hour Market: The markets are situated throughout the different time zones of the globe in such a way that when one market is closing the other is beginning its operations. Thus at any point in time, one market or the other is open. Therefore, it is stated that the foreign exchange market is functioning 24 hours a day.

9. Currencies Traded: In most markets, the US dollar is the vehicle currency i.e. this currency is used to denominate international transactions.

Question 21. What is the Foreign Exchange Market? Write its functions.
Answer: The foreign exchange market is the market in which foreign currencies are bought and sold. The buyers and sellers include individuals, firms, foreign exchange brokers, commercial banks, and the central bank.

• Like any other market, the foreign exchange market is a system, not a place. The transactions in this market are not confined to only one or a few foreign currencies.
• There are a large number of foreign currencies that are traded, converted, and exchanged in the foreign exchange market.

Functions of Foreign Exchange Market: The functions of the foreign exchange market are as follows:

1. Transfer Function: The basic function of any foreign exchange market is to facilitate the conversion of one currency into another, i.e., to accomplish transfers of purchasing power between two countries. This transfer of purchasing power is affected through a variety of credit instruments, such as telegraphic transfers, bank drafts, and foreign bills.

2. Credit Function: Another function of the foreign exchange market is to provide credit, both national and international, to promote foreign trade;, when foreign bills of exchange are used in international payments, a credit for about 3 months, till their maturity, is required.

3. Hedging Function: A third function of the foreign exchange market is to hedge foreign exchange risks. In a free exchange, market when the exchange rate, i.e., the price of one currency in terms of another currency changes, there may be a gain or loss to the party concerned.

• Under this condition, a person or a firm undertakes a great exchange risk if there are huge amounts of net claims or net liabilities that are to be met in foreign money. Exchange risk as such should be avoided or reduced.
• For this, the exchange market provides facilities for hedging anticipated or actual claims or liabilities through forward contracts in exchange.
• A forward contract which is normally for three months is a contract to buy or sell foreign exchange against another currency at some fixed date in the future at a price agreed upon now.
• No money passes at the time of the contract. However, the contract makes it possible to ignore any likely changes in the exchange rate. The existence of a forward market thus makes it possible to hedge an exchange position.

Question 22. Discuss about Types of Market Participants in the Forex Market.
Answer: The participants of the foreign exchange market are as follows:

1. Corporates: Business houses, international investors, and multinational corporations may operate in the market to meet their genuine trade or investment requirements.

• They may also buy or sell currencies to speculate or trade in currencies to the extent permitted by the exchange control regulations.
• They operate by placing orders with the commercial banks. The deals between banks and their clients form the retail segment of the foreign exchange market.

2. Commercial Banks: The Commercial Banks are the major players in the market. They buy and sell currencies for their clients. They may also operate on their own.

• When a bank enters a market to correct excess or sale or purchase position in a foreign currency arising from its various deals with its customers, it is said to do a cover operation.
• Such transactions constitute hardly 5% of the total transactions done by a large bank. A major portion of the volume is accounted for by trading in currencies indulged by the bank to gain from exchange movements.
• For transactions involving large volumes, banks may deal directly among themselves. For smaller transactions, the intermediation of foreign exchange brokers may be sought.

3. Foreign Exchange Brokers: These are the commission agents who bring together suppliers and buyers of foreign currency. They specialize in certain currencies although they deal in all major foreign currencies such as the American dollar, British Pound Sterling Deutsche Mark, etc.

• Some of the services rendered by the brokers include the provision of information on the prevailing and future rates of exchange, maintaining the confidentiality of participants in the foreign exchange market, and helping banks to keep at a minimum the contracts with other traders.

4. Central Banks and Treasuries: National treasuries or central banks may trade currencies to affect exchange rates. A government’s deliberate attempt to alter the exchange rate between two currencies by buying one and selling the other is called ‘intervention’.

• The amount of currency intervention varies greatly from country to country and from time to time and depends mainly on how the government has decided to manage its foreign exchange arrangements.
• Central banks and treasuries use the foreign exchange market to buy and sell the country’s foreign exchange reserves. They also aim to influence the value of their currencies by the priorities of national economic planning.

5. Speculators and Arbitragers: Speculators buy and sell currencies solely to profit from anticipated changes in exchange rates, without engaging in other sorts of business dealings for which foreign exchange is essential.

• Currency speculation is often combined with speculation in short-term financial instruments, such as treasury bills.
• The biggest speculators include leading banks and investment banks. Speculators and arbitragers trade in the foreign exchange market in their way trying to make a profit through normal and speculative operations.
• The main source of profit for dealers is the spread between the bid price and offer price whereas speculators profit from exchange rate changes. It is interesting to note that a large portion of the speculation and arbitrage takes place on behalf of major banks.

6. Retail Clients: These are made up of businesses, international investors, multinational corporations, and the like who need foreign exchange to operate their businesses. Normally, they do not directly purchase or sell foreign currencies themselves; rather they operate by placing buy-sell orders with commercial banks.

Question 23. What are the Factors Affecting the Foreign Exchange Market?
Answer: The following are the factors that affect the foreign exchange market:

Economic Factors: These include economic policy, disseminated by government, agencies, and central banks, economic conditions, generally revealed through economic reports, and other economic indicators.

• Economic policy comprises government fiscal policy (budget spending practices) and monetary policy (how a government’s central bank influences the supply and cost of money, which is reflected by the level of interest rates),

Economic conditions include:

1. Government Budget Deficits or Surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country’s currency.

2. Balance of Trade Levels and Trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates the demand for a country’s currency to conduct trade. Surpluses and deficits in the trade of goods and services reflect the competitiveness of a nation’s economy. For example, trade deficits may hurt a nation’s currency.

3. Inflation Levels and Trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.

4. Economic Growth and Health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization, and others, detail the levels of a country’s economic growth and health. Generally, the more healthy and robust a country’s economy, the better its currency will perform, and the more demand for it there will be.

5. Political Conditions: Internal, regional, and international political conditions and events can have a profound effect on currency markets.

• For example, political upheaval and instability can hurt a nation’s economy. The rise of a political faction that is perceived to be fiscally responsible can have the opposite effect.
• Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.

Market Psychology: Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:

1. Flights to Quality: Unsettling international events can lead to a “flight to quality,” with investors seeking a “haven”. There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The Swiss Franc has been a traditional haven during times of political or economic uncertainty.

2. Long-Term Trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends.

3.“Buy the Rumor, Sell the Fact”: This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event Comes to pass, react in exactly the opposite direction.

• This may also be referred to as a market being “oversold11 or “overbought”.
• To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring when investors focus too much on the relevance of outside events to currency prices,

4. Economic Numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman ike effect; the number becomes important to market psychology and may have an immediate impact on short-term market moves. “What to watch” can change over time.

• In recent years, For Example., money supply, employment, trade balance figures, and inflation numbers have all taken turns in the spotlight.

5. Technical Trading Considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts to identify such patterns.

Stock Market Indices Short Answer Questions

Question 1. Stock Market Index.
Answer: A stock market index is a statistical measure that shows changes taking, place in the stock market. To create an index, a few similar kinds of stocks are chosen from amongst the securities already listed on the exchange and grouped.

• The criteria for stock selection could be the type of industry, market capitalization, or the size of the company. The value of the stock market index is computed using the values of the underlying stocks.
• Any change taking place in the underlying stock prices impacts the overall value of the index. If the prices of most of the underlying securities rise, then the index will rise and vice-versa.
• In this way, a stock index reflects overall market sentiment and the direction of price movements of products in the financial, commodities, or any other markets.

Question 2. How share price index numbers are compiled?
Answer: Share price indices are compiled using a specific methodology to track the performance of a group of stocks over time. The most common method used is the market capitalization-weighted index. Here’s a simplified overview of how share price index numbers are compiled:

1. Selecting Constituent Stocks: The first step is to select a representative group of stocks that accurately reflects the market or sector being tracked. These stocks are known as constituent stocks.

2. Calculating Market Capitalization: The market capitalization of each constituent stock is calculated by multiplying its current stock price by the total number of outstanding shares.

3. Calculating Weighting Factors: The weighting factor for each stock is determined based on its market capitalization as a percentage of the total market capitalization of all constituent stocks.

4. Calculating the Index: The index is calculated by summing the products of each stock’s price and its respective weighting factor. This weighted sum represents the overall performance of the index.

5. Base Value and Base Period: The index is usually assigned a base value at a specific point in time. All subsequent index values are then calculated relative to this base value. The base period allows for easy comparison and analysis.

Question 3. Purpose of an Index in the Stock Market.
Answer: The security market indices are indicators of different things and are useful for different purposes.

The following are the important uses of a stock market index:

• Security market indices are the basic tools to help analyze the movements of prices of various stocks listed on stock exchanges and are useful indicators of a country’s economic health.
• Indices can be calculated industry-wise to know their tread pattern and also for comparative purposes across the industries and with the market indices.
• The growth in the secondary market can be measured through the movement of indices.
• The stock market index can be used to compare a given share price behavior with past movements.
• Generally, stock market indices are designed to serve as indicators of broad movements in the securities market and as sensitive barometers of the changes in trading patterns in the stock market.
• The investors can make their investment decisions accordingly by estimating the realized rate of return on the stock market index between two dates.
• Funds can be allocated more rationally between stocks with knowledge of the relationship of prices of individual stocks with the movements in the market.
• The return on the stock market index, which is known as the market return, helps evaluate the portfolio risk-return analysis.
• According to modern portfolio theory’s capital asset pricing model, the return on a stock depends on whether the stock’s price follows prices in the market as a whole; the more closely the stock follows the market; the greater will be its expected return.

Question 4. Why are Index/Indices Important?
Answer: Indices are used across the global markets by financial professionals, institutions, and individuals for the following purposes: x Stock market indices are the most significant and widely studied parameters in the financial market.

• Investors and traders use the stock market index to analyze the market and manage their investment portfolios.
• Financial institutions use the stock market indices to manage the investment portfolio of clients and draw performance comparisons based on the indices.
• The stock indices indicate the mood and sentiment of the market at a given time. Investors can understand the market’s pattern by looking at the indices and placing profitable buying and selling calls.
• The stock index helps identify profitable stocks and indicates how these stocks have performed compared to their peers.
• Along with stocks, stock market indices show the trend prevailing in different sectors.
• Investors can make passive investments by analyzing the stock indices by choosing index funds that simply mimic the performance of an index.

Question 5. Stock Market Indices in India.
Answer: The Stock Market Index is a barometer of market behavior. The stock market index reflects day-to-day fluctuations in stock prices and market direction. The function of a stock index is to provide information to the investors regarding prices of stocks relating to different industries.

• The stock market is the barometer of economic health as market prices are affected by various economic factors.
• A stock exchange does not indicate the fluctuating prices of all the companies in the country. It only includes best stocks which represent a portion of the overall market. Generally, stocks of a company that performs best in its industry are selected.
• The parameter to select the best company from a particular industry can be the size of the company, market capitalization, performance growth, or some other basis.
• For Example, on the Bombay Stock Exchange, there are two pharmaceutical companies, namely Cipla Ltd. and Dr Reddy’s Laboratories Ltd. These two companies are the best performers in that industry/.
• It is not necessarily fixed that once a company is included in a stock index then it can’t be removed. The composition of a stock exchange alters as per the performance of companies. Stock Exchange may remove a bad-performing company and can add a well-performing new company.

The two most popular stock indexes in India are

1. BSE SENSEX – An index of the Bombay Stock Exchange (BSE) which comprises 30 stocks. SENSEX is the abbreviation for Sensitive Index

2. NSE Nifty – An index of the National Stock Exchange (NSE) that comprises 50 stocks. Any change in the price of the stocks leads to a change in the index value. If the value of one or more stocks increases, then the index value will increase.

• If the value of one or more stocks decreases, the value of the stock decreases.
• It is like the cricket score, if all players play well, then the score increases, when one or more players score many runs and other players do not score runs, then also, the score increases.

Question 6. Determinants of a Stock Index.
Answer: The following parameters should be taken into picture before one constructs a stock index:

1. Liquidity: Liquidity of stocks as measured by the “impact cost” criterion which determines the cost faced when trading the index. For example, if the current market price of a stock is Rs 200 and a trader purchases it at Rs 202 (due to involved transaction costs) then the market impact cost is 1% and the stock is considered highly liquid for lower impact cost.

2. Diversification: Diversification, by putting stocks of various sectors that reflect the economy, is used to cancel out stock noise which is essentially the individual stock fluctuations, and to reduce investor risks. An index must thus have a balanced representation of all sectors.

3. Optimum size: More stocks lead to greater diversification but the limiting factor is the size of the index. Increasing the number of stocks in an index from say 30 gives a sharp reduction in risks but increasing the number beyond a point does very little in risk reduction. Further, it might lead to the addition of illiquid stocks. For example, the optimal size for BSE Sensex is 30.

4. Market Capitalization: The index should include primarily the stocks of companies that have significant market capitalization concerning the index such that any major change in the price of the stock is reflected in the index.

5. Averaging: Every stock primarily moves for two reasons: The news about the company and the news about the country. An ideal index is affected only by the latter, that is the news of the economy and the effect of the former is knocked out by proper averaging

Question 7. Types of Stock Market Indices
Answer: The stock market has a variety of indices. Following are some of the popular indices:

1. Benchmark Index: Benchmark index is the primary metric for analyzing market trends. The index indicates the performance of the entire stock market. The market also uses the benchmark index as a comparative measure. In other words, it measures the market returns from an average fund versus the amount that it would have earned. Examples of benchmark indices are NIFTY50 and BSE Sensex.

2. Broad Market Index: The broad market index is benchmark indices. However, they comprise more number of stocks in the index. For example, BSE Sensex comprises the 30 biggest companies that are financially sound. On the other hand, BSE 100 comprises the top 100 companies.

3. Market Capitalization Index: The market capitalization index comprises stocks based on their total market capitalization, i.e., the value of their outstanding shares. For example, BSE Midcap, NIFTY Smallcap, etc.

4. Sector or Industry-based Index: The index comprises companies or stocks in a particular sector or industry. For example, stocks in industries like banking, healthcare, technology, etc. Some of the sector or industry-based indices are NIFTY FMCG Index, CNX IT, NIFTY Pharma Index, and NIFTY Financial Services Index.

Question 8. Major Stock Market Indices in India.
Answer: The major Indian stock market indices are as follows:

1. NIFTY 50: NIFTY 50 is a market capitalization-weighted index of 50 companies listed on the National Stock Exchange (NSE) in India. It is the benchmark index for the Indian equity market.

2. BSE Sensex: BSE Sensex is a market-capitalization-weighted index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE) in India. It is the oldest index in India and is widely followed as a barometer of the Indian equity market.

3. NIFTY 500: The NIFTY 500 is a broad-based Indian stock market index of 500 companies listed on the National Stock Exchange in India. It represents around 96% of the total market capitalization of the companies listed on the NSE.

4. NIFTY Next 50: NIFTY Next 50 is a market-capitalization-weighted index of the 50 companies listed after the top 50 companies on the National Stock Exchange in India. It is considered a potential source of future market leaders and is also referred to as the junior NIFTY.

Question 9. What Factors Affect Stock Market Indices?
Answer: The factors that can affect stock market indices include:

1. Economic conditions: The state of the economy can have a significant impact on stock market indices. This includes factors such as inflation, interest rates, GDP growth, and employment levels.

2. Corporate earnings: The earnings of individual companies can impact the stock market indices. Because investors often use earnings reports to assess the overall health of a company and make investment decisions accordingly.

3. Political events: Political events can have a significant impact on stock market indices. This includes events such as elections, changes in government policies, and geopolitical tensions.

4. Global market trends: Global market trends can influence the stock market indices. These include trends such as the performance of other stock markets around the world, currency exchange rates, and commodity prices.

Question 10. What are Sectoral Indices?
Answer: Sectoral indices are stock market indices that track the performance of specific sectors or industries within an economy. In other words, they measure the performance of a group of companies operating in a particular sector or industry. Some of the sectoral indices in India are as follows:

1. A Nifty Bank Index/Finnifty
2. Nifty Pharma Index
3. A Nifty IT Index
4. Sectoral indices are useful for investors who want to invest in a specific sector or industry. Because they provide a way to track the performance of that particular sector.
5. They also provide a way for investors to diversify their portfolios across multiple sectors and industries.

Question 11. SENSEX – Scrip Selection Criteria
Answer: The general guidelines for the selection of constituents in SENSEX are as follows:

1. Listing History: The scrip should have a listing history of at least 3 months at BSE. The minimum requirement of 3 months is reduced to one month if the full market capitalization of a newly listed company ranks among the top 10 in the list of the BSE universe.

• In case, a company is listed on account of merger/ demerger/amalgamation, minimum listing history would not be required.

2. Trading Frequency: The scrip should have been traded on every trading day in the last three months. Exceptions can be made for extreme reasons like scrip suspension etc.

3. Final Rank: The script should figure in the top 100 companies listed by final rank. The final rank is arrived at by assigning 75% weightage to the rank based on the three-month average full market capitalization and 25% weightage to the liquidity rank based on the three-month average daily turnover & three-month average impact cost.

4. Market Capitalization Weightage: The weightage of each scrip in SENSEX based on the month’s average free-float market capitalization should be at least 0.5% of the Index.

5. Industry/Sector Representation: Scrip selection would generally take into account a balanced representation of the listed companies in the universe of BSE.

6. Track Record: In the opinion of the Index Committee, the company should have an acceptable track record.

Question 12. Formation of an Index.
Answer: The formation of a stock market index typically involves several steps. Here is a general overview of the process.

1. Choosing a group of stocks: The first step in creating a stock market index is selecting a group of stocks to include in it. This is typically done based on specific criteria, such as market capitalization, trading volume, or industry sector.

2. The weighting of stocks: After selecting the stocks, they are assigned weights based on their market capitalization or some other measure of their significance in the market. This means that larger companies typically impact the index more than smaller ones.

3. Calculation of the index: The index value is based on the weighted average of the prices of the stocks included in it. The exact formula used to calculate the index may vary depending on the index provider. It typically involves taking the sum of the market capitalization of the stocks and dividing it by a divisor that adjusts for changes in the stock prices or other factors.

4. Maintenance of the index: The index is regularly reviewed and rebalanced to ensure it represents the market or sector it intends to track. This may involve adding or removing stocks from the index, adjusting the weights of existing ones, or making other changes to the index formula.

Question 13. Why Are Stock Market Indices Required?
Answer: Stock market indices are essential because they provide a quick and convenient way to track the performance of a group of stocks or the overall market. Here are some key reasons why stock market indices are required.

1. Benchmarking: Stock market indices provide a benchmark against which investors can evaluate the performance of their investments or mutual funds. By comparing their returns to those of a relevant stock market index, investors can gauge their performance and identify areas where they need to improve.

2. Market analysis: Stock market indices can help financial analysts and traders assess the market’s health and identify emerging trends. By monitoring changes in an index over time, analysts can determine whether the market is bullish or bearish and make informed investment decisions accordingly.

3. Diversification: Stock market indices provide an easy way to diversify an investment portfolio. By investing in an index fund or ETF that tracks a specific stock market index, investors can gain exposure to a broad range of stocks with relatively low fees and minimal effort.

4. News and media: Stock market indices are widely covered, making them valuable tools for investors to stay informed about market developments and trends. They provide a convenient shorthand for journalists and analysts to describe market movements and report on economic changes.

Question 14. Creation of Index.
Answer: Indexes can be constructed in a variety of methods, frequently taking into account how to weigh the index’s various components. These are the three key methods:

1. A market-cap, or capitalization-weighted index, such as the S&P 500, gives more weight to the index’s constituents with the highest market capitalization (market value).
2. A price-weighted index gives the components with the highest prices more weight (such as the Dow Jones Industrial Average)
3. An equal-weighted index assigns the same weights to each component (this is sometimes called an unweighted index).

Question 15. Benchmarking.
Answer: A benchmark is an index that is used to gauge the general effectiveness of a mutual fund. It offers a rough estimate of how much an investment should have made, which may be compared to the actual amount it has made.

1. A mutual fund’s goal should ideally be to mirror the value of its benchmark.
2. The fund houses typically choose the benchmark index for a certain investment. It is regarded as the minimum need for that scheme’s return.
3. For smallcap, midcap, and large-cap equity funds in India, several different fund institutions provide benchmarking information using indices like CNX Midcap and Smallcap, BSE 200, NIFTY, Sensex, etc.

Question 16. CNX Nifty Junior.
Answer: The Nifty Junior also consists of fifty stocks, but these stocks belong to the madcap companies. Stocks that have a market capitalization greater than Rs. 2 billion are included to measure the performance of the stock in the madcap range.

1. The liquidity criterion is the same as that of S & P. CNX Nifty. The impact cost should not be greater than 2.5% for 85% of the traded days. The base date is the same for Nifty and Nifty Junior but the base capital is Rs. 0.42 trillion.
2. Nifty Junior represents about 7 percent of the total market capitalization and it is an ideal index to be used in derivative trading.
3. There was a recast in the nifty Junior in 1998 with the number of stocks going up to the Nifty. The composition of the Nifty Junior has also been overhauled. Apart from the six that moved to the nifty, Ispat Industries, Hindustan Powerplus, Alstom India, Kotak Mahindra, and Lakme have been excluded.
4. The eleven stocks replacing these in the Nifty Junior are Bank of Baroda, Tata Infotech, Dr. Reddy’s Labs, Satyam Computers, Zee Telefilms, Pentafour Software, Nirma, Nicholas Piramal, ICI India, ICICI Bank and GSFC.
5. Nifty Junior turns out to be as nimble as its predecessor. The odds are high because of the sluggish nature of five of the excluded stocks as well as the quality of the new entrants.

Question 17. S&P CNX 500.
Answer: It is a broad-based index consisting of 500 scrips. The companies are selected based on their market capitalization, industry representation, trading interest, and financial performance. The market capitalisation is used as weight. The company’s influence on the index depends upon its market capitalization.

1. The companies selected are either leaders or representatives of their industries. They should reflect the movement of their industry.
2. The industry groups included in the S & P. CNX 500 are 79. The number of representatives from each industry group is changed to reflect the market.
3. The selected companies should have a minimum record of three years of operation with a positive net worth. The base year is 1994 because it is considered to be closer to the post-liberalization era.
4. Since the index is a broad-based one, it represents 72 percent of the total market capitalization and 98 percent of the total traded value.
5. As it is weighted with market capitalization, it mirrors the market movement more effectively. The broad base of the index provides a benchmark for comparing portfolio return with market return.

Question 18. Factors contributing to the growth of Derivatives.
Answer: Factors contributing to the explosive growth of derivatives are price volatility, globalization of the markets, technological developments, and advances in financial theories.

1. Price Volatility: A price is what one pays to acquire or use something of value. The objects having value may be commodities, local currency, or foreign currencies. The concept of price is clear to almost everybody when we discuss commodities.

There is a price to be paid for the purchase of food grain, oil, petrol, metal, etc. The price one pays for the use of a unit of another person’s money is called the interest rate. And the price one pays in one’s currency for a unit of another currency is called as an exchange rate.

2. Globalization of the Markets: Earlier, managers had to deal with domestic economic concerns; what happened in another part of the world was mostly irrelevant. Now globalization has increased the size of markets and has greatly enhanced competition.

3. Technological Advances: A significant growth of derivative instruments has been driven by technological breakthroughs. Advances in this area include the development of high-speed processors, network systems, and enhanced methods of data entry.

• Closely related to advances in computer technology are advances in telecommunications. Improvement in communications allows for instantaneous worldwide conferencing and data transmission by satellite.

4. Advances in Financial Theories: Advances in financial theories gave birth to derivatives. Initially forward contracts in their traditional form, were the only hedging tool available. Option pricing models developed by Black and Scholes in 1973 were used to determine prices of call and put options

5. Development of sophisticated risk management tools: In certain derivative trading, a typical type of risk emerges. To manage this, sophisticated tools have been developed. This “solution to derivative problems” adds further growth in the derivative market.

Question 19. Importance of Derivative markets
Answer: Importance of Derivative markets:

1. It increases the volume of transactions.
2. In derivative markets, the transaction costs are lower
3. The risk of holding underlying assets is lower
4. It gives increased liquidity to investors
5. It leads to faster execution of transactions
6. It enhances the price discovery process
7. It facilitates the transfer of risk from risk-averse investors to risk-takers.
8. It increases the savings and investments in the economy.

Question 20. Participants in a Derivative Market.
Answer: The derivatives market is similar to any other financial market and has the following three broad categories of participants:

1. Hedgers: These are investors with a present or anticipated exposure to the underlying asset which is subject to price risks. Hedgers use the derivatives markets primarily for price risk management of assets and portfolios.

2. Speculators: These are individuals who take a view on the future direction of the markets. They take a view of whether prices would rise or fall in the future and accordingly buy or sell futures and options to try and make a profit from the future price movements of the underlying asset.

3. Arbitragers: These are the third most important participants in the derivatives market. They take positions in financial markets to earn riskless profits. The arbitragers take short and long positions in the same or different contracts at the same time to create a position that can generate a riskless profit.

Question 21. What is the commodity market?
Answer: A commodity is any good or service that can be exchanged for other goods and services in the marketplace. A commodity market is a place where these goods and services can be sold, bought, or traded.

1. A commodity market is a marketplace that facilitates the exchange of goods for immediate deliveries between the country’s residents. The main benefits of commodity investment in the market are:
2. Investments can be made in both short-term and long-term products
3. It helps in the diversification of the portfolio
4. Provides an edge over fighting the inflation rates of the economy
5. Mitigation of the risk involved

Question 22. Kinds of commodity markets,
Answer: The physical market and the derivatives market are the two kinds of commodity markets.

1. Physical Commodity Market: PhysicaT’Comrnodity Market: In this commodity market, people buy and sell the actual goods. Thmgsdlke metals, farm goods, and energy are dealt with in their actual form.

• Most of the time, these goods are sold at places like commodity exchanges, auction houses, or through bilateral contracts.
• In a physical market, buyers and sellers talk directly about the price and other terms of the deal. The forces of demand and supply in the market decide how much a commodity costs.
• Physical commodity markets are important to the world economy because they give people who make and use commodities a place to buy and sell things.

2. Derivatives Commodity Market: Derivatives Commodity Market: On the derivatives commodity market, people buy and sell contracts that say they will buy or sell a certain good at a certain time in the future.

• Futures contracts are what people call these agreements. They are traded on commodity markets. The derivatives market lets buyers and sellers hedge against price risk and bet on how much an item will go up or down in the future.
• A lot of different people use the derivatives commodity market, including producers, buyers, speculators, and investors.

Question 23. Price Determination in Commodity Exchange.
Answer: Various factors help in determining the price of the commodity investment in an economy. Following are some of the major factors that help in determining the price in the commodity market:

1. Supply and Demand of the Market: The rise in demand means an increase in the price of a commodity due to higher demand and shorter supply. The constant battle of supply and demand is very overwhelming and small investors usually look for safer investment options rather than keeping a regular check on the commodity market.

2. The Worldwide Scenario: Any activity happening anywhere on the globe will have a direct impact on commodity sales and purchases. For instance, the United States is the major supplier of petrol in the world. If any major turmoil occurs in the US, it will directly affect the price of petrol, globally and domestically.

3. Market Outlook: Chances of major changes in the price of particular commodities like precious metals are rare, hence drastic changes in the stock market make investors shift towards commodity investments. Commodity investments, therefore, are considered a safer investment option when compared to the stock market.

4. External Factors: The production of the commodity affects the price change of the commodity in the market. For instance, a rise in the production cost subsequently affects the selling price of the commodity, eventually affecting the equilibrium.

Question 24. Type of Traders in Commodity Market.
Answer: There are 2 types of traders in the commodity market based on operations:

1. Hedgers: Hedgers enter into future contracts rather than entering into current exposures of the market with the traders. Because of the futures trading, the current market rates do not affect the hedgers and the rate at which they trade with the investors.

2. Speculators: Speculators are investors who aim to generate profits from the current commodity market. The investors predict future contracts depending upon various factors related to the commodity market and make investments accordingly.

Question 25. Classification of the Commodities in Commodity Market.
Answer: There are two main classifications of commodities in the commodity market:

1. Hard Commodities: Hard commodities are essential for the manufacturing sectors of the economy. These commodities are naturally sourced, requiring manual extraction from land or water, often involving mining activities. Examples include coal, gold, crude oil, gasoline, and rubber, among others.

2. Soft Commodities; Soft commodities encompass goods primarily related to livestock or agriculture. Unlike hard commodities, they are produced using appropriate methods rather than being extracted from the earth. Examples consist of wheat, corn, barley, pork, tea, and similar items.

Question 26. Types Of Commodities Traded In Commodity Market
Answer: The commodity market is driven by the basic principle of supply and demand. Different types of commodities are traded into 4 categories including energy, livestock and meat, agriculture, and metal.

1. Metals: Commodities in metal include silver, platinum, copper and gold. Investors usually invest in precious metals since it is reliable and has conveyable value.

2. Energy: Any shift in the production by the Organization of the Petroleum Exporting Countries and new technological advances in alternative energy sources impact the market prices for commodities in the energy sector.

3. Agriculture: Agriculture commodities along with limited agricultural supply provide opportunities to profit from the increased agricultural commodity prices. This can be a volatile sector since most produce is season-based.

4. Livestock and Meat: Such commodities include pork bellies, live cattle, lean hogs, and feeder cattle.

Question 27. Currency Market/Foreign Exchange Market.
Answer: The Foreign Exchange Market is the market where the buyers and sellers are involved in the buying and selling of foreign currencies.

• Simply, the market in which the currencies of different countries are bought and sold is called as a foreign exchange market. The foreign exchange market is commonly known as FOREX, a worldwide network that enables exchanges around the globe.
• The foreign exchange market is a counter (OTC) global marketplace that determines the exchange rate for currencies around the world. This foreign exchange market is also known as Forex, FX, or even the currency market. The participants engaged in this market can buy, sell, exchange, and speculate on the currencies.
• These foreign exchange markets consist of banks, forex dealers, commercial companies, central banks, investment management firms, hedge funds, retail forex dealers, and investors.

Question 27. Need to Foreign Exchange Market,
Answer: The foreign exchange market is a crucial international market and is the world’s most respected financial institution. Daily, the forex exchange trades with approximately two trillion us dollars foreign exchange transactions are central to global commerce.

1. Protection of currency: To accumulate the reserve governments protect the currency trade with the help of the foreign exchange market. It affects by value of the currency and it is easy to make payments. If the economy changes then the central bank can ensure the reserves are enough to face the situation.

2. Job opportunities: With the increased use of the internet, online forex exchange has become a prominent feature in the foreign exchange market. Many people earn a living by trading currencies online daily which in turn increases job opportunities.

3. Hedging facilitator: Forex is a hedging facilitator. Here heading means protecting the business from risk. It provides business owners with a mechanism that guards them against incurring losses if the values of the currencies they trade in fluctuate.

4. Facilities international trade: The need for acquiring currency to trade arises when the business deals with other country investors. Transfer of purchasing is facilitated by foreign exchange among the countries. By acquiring capital purchasing power can be enhanced.

5. Currency liquidity: The foreign exchange market provides liquidity for currencies. Liquidity is the ease with which it can convert a foreign currency into a domestic currency.

6. Credit provision: It has a facility of credit provision. It helps to enhance the growth of foreign trade. Most investors dealing with international trade depend on the credit facilities that are advanced to them by forex markets.

Question 28. Types of Foreign Exchange Market.
Answer: The Foreign Exchange Market has its varieties. The Major Foreign Exchange Markets are as follows:

1. Spot Market: In this market, the quickest transaction of currency occurs. This foreign exchange market provides immediate payment to the buyers and the sellers as per the current exchange rate. The spot market accounts for almost one-third of all the currency exchange, and trades which usually take one or two days to settle the transactions.

2. Forward Market: In the forward market, there are two parties which can be either two companies, two individuals, or government nodal agencies. In this type of market, there is an agreement to do a trade at some future date, at a defined price and quantity.

3. Future Markets: The future markets come with solutions to several problems that are being encountered in the forward markets. Future markets work on similar lines and basic philosophy as the forward markets.

4. Option Market: An option is a contract that allows (but is not as such required) an investor to buy or sell an instrument that is underlying like a security, ETF, or even index at a determined price over a definite time. Buying and selling ‘options’ are done in this type of market.

5. Swap Market: A swap is a type of derivative contract through which two parties exchange the cash flows or the liabilities from two different financial instruments. Most swaps involve these cash flows based on a principal amount.

Question 28. Who are the Participants in a Foreign Exchange Market?
Answer: The participants in a foreign exchange market are as follows:

1. Central Bank: The central bank takes care of the exchange rate of the currency of their respective country to ensure that the fluctuations happen within the desired limit and this participant keeps control over the money supply in the market.

2. Commercial Banks: Commercial banks are the channel of forex transactions, which facilitates international trade and exchange to its customers. Commercial banks also provide foreign investments.

3. Traditional Users: The traditional users consist of foreign tourists, the companies who carry out business operations across the globe.

4. Traders and Speculators: The traders and the speculators are the opportunity seekers who look forward to making a profit through trading on short-term market trends.

5. Brokers: Brokers are considered to be the financial experts who act as a sure intermediary between the dealers and the investors by providing the best quotations.

Stock Exchanges Essay Questions

Question 1. What is BSE? What are the Features of the Bombay Stock Exchange
Answer: The Bombay Stock Exchange is the first and oldest stock exchange in India which was founded in 1875 as the Naive Share and Stock Brokers Association.

• The BSE is located in Mumbai, India, and lists more than 5000 companies with a total market capitalization of $3.5 trillion.
• The Bombay Stock Exchange played a vital role in the development of India’s capital market, including the retail debt market, and providing the Indian corporate sector with an efficient platform to raise investment capital.

Features of the Bombay Stock Exchange (BSE):

The following are a few prominent characteristics of the Bombay Stock Exchange (BSE):

1. Stock Trading: The Bombay Stock Exchange (BSE) serves as a key marketplace for the exchange of equities, namely stocks and shares, belonging to publicly listed corporations inside India. Investors can engage in the purchase and- sale of these securities within the specified trading hours.

2. Listing Services: Through initial public offerings (IPOs) and follow-on public offerings (FPOs), the BSE helps companies get listed in the stock market. Companies can get money by selling shares to the public and getting listed on an exchange.

3. Commodities Trading: BSE also has a place where buyers can buy and sell derivatives of commodities like gold, silver, and agricultural goods.

4. Regulatory Compliance: The BSE makes sure that listed companies follow the rules set by the Securities and Exchange Board of India (SEBI) and other important bodies about disclosure and other rules.

5. Corporate Governance: The exchange encourages good corporate governance and openness among businesses that are listed, which is important for maintaining investor trust.

6. Market Indices: BSE manages and publishes various market indices, with the BSE Sensex being the most notable. These indices serve as benchmarks to gauge the overall performance of the stock market and specific sectors.

7. Investor Education and Awareness: BSE is involved in initiatives to educate and create awareness among investors. This includes providing information about financial markets, investment strategies, and risk management to enhance investor knowledge.

8. Market Surveillance and Risk Management: BSE employs advanced technology for market surveillance to detect any irregularities or unusual trading patterns. Additionally, the exchange has robust risk management systems in place to ensure the stability and integrity of the market.

9. Technology Infrastructure: BSE continually invests in upgrading its technology infrastructure to provide a seamless and efficient trading experience. The exchange has adopted advanced trading platforms and systems to keep pace with global standards.

10. Derivatives Trading: BSE offers a platform for trading in derivatives, including futures and options contracts. Derivatives provide investors with tools for hedging and speculation on the future price movements of various financial instruments.

11. Investor Protection Fund (IPF): BSE has established the Investor Protection Fund to compensate investors in case of financial losses resulting from fraudulent activities by trading members or other market participants.

12. Collaborations and Partnerships: BSE collaborates with other financial institutions, both domestically and internationally, to foster cooperation and enhance the efficiency of financial markets.

Question 2. Write the objectives and importance of BSE.
Answer: The Bombay Stock Exchange is the first and oldest stock exchange in India as well as Asia. It was founded by Premchand Roychand in 1875 and is currently managed by S.S. Mundra, serving as the chairman of BSE.

• The BSE is located in Mumbai, India, and lists more than 5000 companies with a total market capitalization of $3.5 Trillion. Also, BSE is one of the largest stock exchanges in the world, along with the New York Stock Exchange (NYSE), NASDAQ, London Stock Exchange Group, and Japan Exchange Group.

Objectives of BSE:

The objectives of the Bombay Stock Exchange (BSE) are:-

1. To provide an efficient and transparent market for trading in equity, debt instruments, derivatives, and. mutual funds.
2. To provide a trading platform for equities of small and medium enterprises.
3. To ensure active trading and safeguard market integrity through an electronically-driven exchange.
4. To provide other services to capital market participants, like risk management, clearing, settlement, market data, and education.
5. To conform to international standards.

Importance of the Bombay Stock Exchange (BSE):

1. Liquidity and Investment Opportunities: The BSE facilitates the purchase and sale of equities and other financial instruments, providing a liquid market for investors to exchange their investments. This liquidity facilitates the purchase and sale of assets by investors.

2. Economic Indicator: The performance of the BSE is frequently viewed as a barometer of the Indian economy as a whole. When the stock market performs well, it may indicate economic growth and stability.

3. Financial Inclusion: The BSE has introduced several initiatives aimed at encouraging financial inclusion, making it possible for a broader segment of the population to invest in the stock market and thus participate in wealth creation and economic development.

4. Market Benchmark: BSE’s primary index, the S&P BSE Sensex, is widely regarded as an indicator of the Indian stock market’s performance. Investors, analysts, and fund managers use it to evaluate market trends and performance.

5. Corporate Governance and Transparency: Listed companies on the BSE are subject to stringent regulatory and reporting requirements that encourage transparency and corporate governance. This is essential for establishing investor confidence.

6. Global Integration: The BSE is part of the global financial system, and its performance and activities are closely monitored by international investors and financial institutions. This integration provides Indian companies with access to global capital and allows international investors to participate in the Indian economic growth story.

7. Facilitates Price Discovery: The BSE serves as a platform where the prices of securities are determined through the forces of supply and demand. This price discovery mechanism helps in establishing fair market values for stocks, enabling investors to make informed decisions.

8. Job Creation and Economic Growth: A vibrant stock exchange contributes to overall economic growth by fostering entrepreneurship and job creation. As companies raise capital on the BSE, they can expand their operations, leading to increased employment opportunities and economic prosperity.

Question 3. What is the Bombay Stock Exchange? Write the Functions of BSE.
Answer:  The BSE is the oldest stock exchange in Asia; it was established in 1875 as the Native Shares and Stock Broker’s Association. It was the first exchange in India recognized as the exchange in 1957 under the Securities Contract (Regulation) Act by the government.

• The BSE Sensex, comprising 30 of the largest and most actively traded stocks on the BSE, is India’s benchmark stock market index. The BSE has a significant impact on the Indian economy and is considered a barometer of the country’s economic performance.

1. Facilitating Trading: BSE provides a marketplace where buyers and sellers can come together to trade a wide range of financial instruments. It offers a platform for both spot trading of equities and trading in derivative contracts.

2. Listing and Disclosure: BSE provides a platform for companies to list their shares. It establishes listing requirements and standards that companies must meet to become publicly traded entities. Listed companies are also required to adhere to continuous disclosure norms, providing timely and accurate information to investors.

3. Price Discovery: BSE plays a crucial role in price discovery by providing a transparent and efficient marketplace where the prices of securities are determined based on the interactions of buyers and sellers.

4. Market Surveillance: BSE monitors trading activities to detect any unusual or suspicious activities that could potentially harm market integrity. It employs advanced surveillance tools to identify market manipulation, insider trading, and other irregularities.

5. Regulation: BSE operates within the regulatory framework set by the Securities and Exchange Board of India (SEBI). It ensures that trading participants, listed companies, and other stakeholders adhere to SEBI’s rules and guidelines.

6. Market Indices: BSE calculates and publishes several market indices, including the Sensex and the BSE 500 Index. These indices serve as benchmarks to gauge the overall performance of the stock market and specific sectors.

7. Trading Platforms: BSE provides various trading platforms for different types of securities, including equities, bonds, and derivatives. The exchange offers electronic trading platforms for efficient and transparent order execution.

8. Investor Education: BSE undertakes initiatives to educate and inform investors about various aspects of investing, trading, and financial literacy. This helps investors make informed decisions and understand market dynamics.

9. Technology Infrastructure: BSE continuously invests in technological advancements to ensure the smooth functioning of trading systems, order matching, and data dissemination.

10. Market Data and Research: BSE provides real-time market data, historical price charts, and research reports to traders, investors, and analysts for making informed decisions.

11. Corporate Governance: BSE promotes good corporate governance practices among listed companies, enhancing transparency and accountability.

12. Listing Compliance: BSE monitors listed companies’ compliance with various listing requirements, corporate governance norms, and disclosure norms to maintain market integrity.

13. Investor Protection: BSE works to protect the interests of investors by ensuring fair and transparent trading practices, timely dissemination of information, and adherence to regulatory guidelines.

14. Market Development: BSE plays a role in developing new financial products and services, expanding trading opportunities, and contributing to the growth of India’s financial markets.

Question 4. Explain the advantages and disadvantages of investing in BSE.
Answer: The Bombay Stock Exchange is one of the largest securities markets. It is located on Dalai Street, Mumbai, and lists over 6000 companies. BSE has contributed significantly to developing and shaping India’s capital markets.

• It also offers capital market trading services that include investor education, risk management, clearing, settlement, and many more.

Advantages of BSE:

1. Capital Infusion: Listing on the BSE provides companies with an avenue to raise capital by issuing shares to the public through initial public offerings (IPOs) or follow-on public offerings (FPOs). This capital can be utilized for expansion, investment in new projects, debt repayment, or other strategic initiatives.

2. Liquidity for Shareholders: Shareholders of BSE-listed companies benefit from the liquidity of their investments. The ability to buy and sell shares on the stock exchange provides shareholders with a market where they can easily trade their holdings, offering liquidity and flexibility.

3. Enhanced Profile and Reputation: Being listed on a prestigious stock exchange like BSE can enhance a company’s profile and reputation. It signals to the market that the company has met certain standards and governance requirements, potentially attracting new customers, partners, and investors.

4. Access to a Diverse Investor Base: BSE provides access to a broad and diverse investor base, including domestic and international investors. This can lead to increased demand for the company’s shares and potentially lower the cost of capital.

5. Regulatory Compliance and Transparency: Listing on the BSE requires companies to adhere to regulatory and disclosure requirements set by SEBI and other regulatory bodies. This ensures a higher level of transparency and accountability, building trust among investors and stakeholders.

6. Market Recognition: Being listed on a prominent stock exchange like the BSE provides market recognition and can instill confidence in investors, customers, and business partners.

7. Legal Supervision: Investors can skim through fraudulent companies if they choose to invest in organizations listed with BSE.

• Several rules and regulations are mandated by SEBI to monitor the actions of registered companies, minimizing the chances of investors incurring a loss due to illicit activities of a business.

8. Adequate Pricing Rules: The price of securities trading in the BSE share market is determined by the demand and supply of the same currently prevailing. This reflects the real value of a share, affecting a company’s market capitalization and ease of procurement of funds.

9. Timely Information Display: Adequate information about total revenue generation and reinvestment patterns has to be published annually by all companies listed under the BSE stock exchange.

• Total dividend disbursed, bonus and transfer issues, book-to-closure facility, etc., have to be displayed as per SEBI regulations.

10. Collateral Guarantee: Securities issued by a company act as a collateral guarantee at the time of availing loans. Most financial institutions accept equity shares listed in BSE as leverage against which funds can be obtained.

Disadvantages of BSE:

1. Market Volatility: Stock markets, including the BSE, can be highly volatile. Prices of stocks can fluctuate rapidly based on various factors such as economic conditions, geopolitical events, and company-specific news. This volatility can lead to significant financial losses for investors.

2. Market Risks: Investing in stocks always carries inherent risks. Factors such as economic downturns, industry-specific challenges, or global events can impact stock prices negatively.

3. Lack of Control: Shareholders in publicly traded companies have limited control over the day-to-day operations and management decisions of the company. Decisions are typically made by the company’s management and board of directors.

4. Market Manipulation: Despite regulatory measures, there is always a risk of market manipulation, including insider trading and fraudulent activities. Such practices can harm the interests of small investors.

5. Liquidity Risks: While liquidity is generally an advantage, it can also pose risks. In times of market stress or for smaller stocks, liquidity may dry up, making it challenging to buy or sell shares at desired prices.

6. Regulatory Changes: Regulatory changes in financial markets can impact the trading environment and affect market participants. Changes in tax regulations or listing requirements can have implications for companies and investors.

Question 5. Describe the role of BSE in the Indian Stock Market.
Answer: The Bombay Stock Exchange (BSE) plays a crucial role in the Indian stock market, serving as one of the major stock exchanges in the country. Its role encompasses various functions that contribute to the efficient functioning of the Indian capital market. The following points highlight the role of BSE in the Indian stock market:

1. Primary Capital Raising: The BSE provides a platform for companies to raise capital by issuing shares to the public through Initial Public Offerings (IPOs). This process allows companies to raise funds for expansion, investment, or other corporate purposes.

2. Secondary Market Trading: The BSE facilitates the trading of listed securities in the secondary market. Investors, including institutional and retail investors, can buy and sell shares of publicly listed companies, providing liquidity to market participants.

3. Benchmark Index: The BSE’s flagship index, SENSEX, serves as a benchmark for the Indian stock market. It reflects the overall performance of a select group of large-cap companies and is widely followed by investors, analysts, and the media to gauge market trends.

4. Market Regulation: The BSE operates within the regulatory framework established by the Securities and Exchange Board of India (SEBI). It enforces listing requirements, trading rules, and other regulations to ensure fair and transparent market practices.

5. Listing Platform: Companies seeking to go public can list their shares on the BSE. The listing process involves meeting regulatory compliance standards and disclosure requirements, which enhances transparency for investors.

6. Market Surveillance: The BSE employs surveillance mechanisms to detect and prevent market manipulation, fraud, and other irregularities. This helps maintain the integrity of the market and protects investors.

7. Investor Education: The BSE plays a role in educating investors about the functioning of the stock market, investment opportunities, and risk management. This is crucial for fostering investor confidence and participation.

8. Derivatives Trading: The BSE offers a platform for the trading of equity derivatives, including futures and options. This allows investors to hedge their portfolios, speculate on price movements, and manage risk.

9. Technology Infrastructure: The BSE invests in technology infrastructure to ensure efficient and secure trading. The adoption of advanced trading platforms, settlement systems, and risk management tools contributes to the smooth operation of the exchange.

10. Market Development: The BSE actively contributes to the development of the Indian capital market by introducing new financial instruments, promoting corporate governance practices, and aligning with global best practices.

11. International Integration: The BSE engages in initiatives to integrate with international markets, attracting foreign investors and promoting cross-border investment opportunities.

Question 6. What is NSE? Write the salient features of NSE.
Answer: The National Stock Exchange (NSE) is the leading stock exchange in India, headquartered in Mumbai, Maharashtra. It was incorporated in the year 1992 as the first dematerialized electronic stock exchange in the country.

• In 1994, NSE commenced its operations on the order of the Indian government to bring transparency to the capital market. By 2015, NSE became the fourth largest stock exchange in the world by its trading volume.
• NSE allows investors to invest in domestic and global securities. The total number of companies listed on the NSE is approximately 1741, with a total market capitalization of $3.4 trillion.

1. Electronic Trading: One of the most significant features of the National Stock Exchange is its fully automated electronic trading system. This pioneering move in India was replacing the open outcry system and making trading more transparent and efficient.

2. Wide Range of Securities: From equities and bonds to derivatives and currency futures, NSE offers diversified trading options, making it a one-stop shop for investors.

3. High Liquidity: With high trading volumes and many market participants, the NSE offers excellent liquidity, making it easier for investors to buy and sell securities.

4. Stringent Regulations: The National Stock Exchange operates under strict regulatory oversight, ensuring that all market participants adhere to the laws, thereby protecting investor interests.

5. Transparency: Advanced technology and real-time data dissemination make NSE one of the most transparent stock exchanges in the world.

6. Innovation: Whether introducing new indices or launching new financial products, NSE has always been at the forefront of innovation.

7. Security: With state-of-the-art security measures, the National Stock Exchange ensures that trading activities are secure from fraud.

8. User-Friendly Interface: The trading platform of NSE is designed to be user-friendly, facilitating ease of use for novice and experienced investors.

9. Investor Services: Beyond trading, NSE offers a range of services like market analytics, data services, and investor education programs to improve market participation and financial literacy.

10. Automated Lending and Borrowing Mechanism (ALBM): To carry on an orderly system, NSE Promoted lending in securities called ALBM.

11. Rolling settlement: Initially NSE introduced weekly settlements every Thursday, for the transactions taking place between the previous Wednesday to the settlement day. However, fixed settlement day is unjust as it gives different lengths of time for settlement.

12. Listing: A company should have a minimum, paid-up capital of Rs – 10 crore. Only large and medium-sized companies’ securities are allowed for listing on the NSE apart from the securities of public sector undertakings.

Question 7. Elucidate the objectives am importance of NSE.
Answer: The National Stock Exchange of India was incorporated in the yearl992. It was recognized as a Stock Exchange in 1993 and started operations in 1994. It was established by leading banks, financial institutions, insurance companies, and financial intermediaries.

Objectives of NSE:

• NSE was established with the following objectives.
• Establishing a nationwide trading facility for all types of securities.
• Ensuring equal access to investors all over the country through an appropriate communication network.
• Providing a fair, efficient, and transparent securities market using an electronic trading system.
• Enabling shorter settlement cycles and book entry settlements.
• Meeting international benchmarks and standards.
• Provide traders with a fair, efficient, and transparent securities market through an electronic trading system.

Importance of NSE:

1. Financial Inclusion: NSE contributes to financial inclusion by providing a platform for a diverse range of investors, including retail investors, institutional investors, and foreign investors, to participate in the capital markets.

2. Economic Indicator: The performance of the stock market, as reflected by indices like Nifty, is often considered an indicator of the overall economic health of the country. Movements in the stock market can influence investor confidence and economic sentiment.

3. Investor Protection: NSE plays a key role in regulating and overseeing market activities to ensure fair and transparent trading. It establishes rules and regulations to protect investors and maintain market integrity.

4. Technology and Innovation: NSE has been at the forefront of adopting technology and implementing innovative solutions in its trading platforms. The use of advanced technology has contributed to improved market efficiency, transparency, and reduced settlement times.

5. Market Benchmark: NSE’s Nifty 50 index is one of the most widely followed equity indices in India. It serves as a benchmark for the performance of the Indian stock market and is used by investors, fund managers, and analysts to assess market trends and make investment decisions.

6. Liquidity and Market Efficiency: The NSE is one of the largest stock exchanges in India, providing a platform for trading a wide range of financial instruments such as equities, derivatives, and debt securities. The presence of a liquid and efficient market is essential for investors to buy and sell securities easily.

7. Market Research and Information: NSE disseminates a wealth of market information, research reports, and data. This information is valuable for investors, analysts, and financial institutions in making informed investment decisions and conducting market analysis.

8. Risk Management: The exchange provides robust risk management mechanisms, including margin trading systems and settlement processes, to mitigate risks associated with market volatility. This helps maintain the stability and integrity of the financial system.

9. Regulatory Compliance: NSE operates under the regulatory framework of the Securities and Exchange Board of India (SEBI). Adherence to SEBI regulations ensures that market participants follow standardized practices, promoting transparency and protecting the interests of investors.

Question 8. Describe the functions of NSE.
Answer: Founded in the year 1992, the National Stock Exchange, or the NSE, is the leading stock exchange in India and the second largest in the world. It is also known to be the first dematerialized stock exchange in India with a fully automated, screen-based electronic trading system.

Functions of NSE:

1. Market Making: NSE acts as a marketplace where buyers and sellers can trade various securities, such as equities, bonds, derivatives, and other financial instruments.

2. Price Discovery: Through its advanced electronic trading system, the National Stock Exchange helps in the fair and transparent discovery of prices, ensuring that every security is traded at its true market value.

3. Liquidity Provider: With many listed companies and high trading volumes, NSE provides ample liquidity to market participants, making entering or exiting positions easier.

4. Clearing and Settlement: NSE has a clearing house that ensures all trades are settled efficiently and on time. This significantly reduces the risk of default.

5. Indices Management: The National Stock Exchange is renowned for its market indices like NIFTY 50, which serve as benchmarks for the Indian economy and various investment products.

6. Risk Management: Through stringent regulations and real-time monitoring, NSE minimizes market risk and ensures a level playing field for all investors.

7. Investor Education: NSE takes upon itself to educate investors through various programs, aiming to improve financial literacy among the masses.

8. Data Services: The National Stock Exchange provides market data and analytics crucial for individual and institutional investors to make informed decisions.

9. Regulatory Functions: NSE operates under the regulation of the Securities and Exchange Board of India (SEBI), and it plays a key role in ensuring that market participants adhere to the laws.

10. Technology Upgradation: The National Stock Exchange has implemented cutting-edge technology to make trading more efficient, secure, and accessible.

Question 9. Explain the benefits and limitations of NSE.
Answer: The National Stock Exchange of India Ltd. was set up with the primary idea of facilitating computerized trading in Debt Market Instruments.

• This was incorporated in November 1992 by the Industrial Development Bank of India and other India Financial Institutions and recognized as a Stock Exchange from April 26, 1993, to provide Nationwide Stock Trading facilities.
• The National Stock Exchange has a fully automated screen-based trading system and operates on the principles of an order-driven market. National Stock Exchange is the outcome of the recommendations of the Shri M.J. Pherwani Committee.

Benefits of Listing with NSE:

1. Enhanced Visibility: Companies listed on NSE gain immense market visibility due to their reputation and reach, attracting more investors.

2. Access to Capital: Listing on NSE gives companies easier access to capital for their growth and expansion plans.

3. Credibility Boost: The stringent regulatory norms for listing enhance the company’s credibility, making it more appealing to investors.

4. Liquidity: The National Stock Exchange’s large trading volume ensures high liquidity for listed securities, enabling easier buying and selling.

5. Transparency: The advanced electronic trading system ensures transparent price discovery and trade execution.

6. Global Reach: NSE’s alliances with international exchanges expose companies to global investors.

7. Investor Trust: Being listed on a prestigious platform like NSE builds investor confidence, which can benefit the company in the long run.

8. Effective Communication: Listed companies can effectively communicate corporate actions like dividends, bonus issues, and rights issues through the National Stock Exchange platform, ensuring that shareholders are well-informed.

9. Regulatory Compliance: NSE ensures that listed companies comply with all regulatory norms, safeguarding the interests of investors.

10. Market Analytics: Companies get access to valuable market data and analytics, which can guide their future strategies.

Limitations:

1. Market Volatility: The stock market, including NSE, can be subject to volatility. Companies listed on the exchange may experience fluctuations in their stock prices, which could impact investor confidence and the company’s market capitalization.

2. Costs of Compliance: Compliance with NSE’s regulations and reporting requirements involves certain costs. Companies need to allocate resources for legal, accounting, and regulatory compliance, which can be a burden for smaller companies.

3. Liquidity Concerns: Smaller companies may face challenges in maintaining liquidity in their stocks, illiquid stocks can experience higher volatility and may not be as attractive to institutional investors.

4. Listing Requirements: NSE has stringent listing requirements that companies must meet. These criteria include financial performance, minimum public shareholding, and corporate governance standards. Companies that do not meet these requirements may face challenges in getting listed.

5. Cost of Initial Public Offering (IPO): Conducting an Initial Public Offering (IPO) to get listed on NSE involves substantial costs. Expenses related to underwriting fees, legal expenses, marketing, and compliance can be significant, particularly for smaller companies.

6. Market Manipulation Risks: Companies listed on the NSE are vulnerable to market manipulation risks, such as price rigging or insider trading. Regulatory bodies actively monitor and investigate such activities, but the risk still exists, potentially impacting the market value of listed companies.

Question 11. Describe the organizational structure and management of NSE.
Answer: The National Stock Exchange of India Limited (NSE) is the largest financial exchange in the Indian market. It was established in 1992 on the recommendation of the High-Powered Study Group, which was founded by the Indian government to provide solutions to simplify participation in the stock market and make it more accessible to all interested parties. In 1994, the NSE introduced electronic trading in the Indian stock exchange market.

Organization and management of NSE:

The organization and management of NSE involve several key aspects:

1. Governance and Structure: NSE operates under the regulatory framework of the Securities and Exchange Board of India (SEBi). It has a board of directors responsible for the overall governance and strategic decision-making. The board includes representatives from various stakeholders, including public institutions, financial institutions, and market participants.

2. Management Team: NSE is headed by a Managing Director and Chief Executive Officer (CEO) who oversees the day-to-day operations of the exchange. The management team comprises professionals from diverse backgrounds, including finance, technology, and legal, who manage various departments and functions.

3. Market Segments and Products: NSE offers various market segments and products. The key segments include Equity Cash, Equity Derivatives, Currency Derivatives, and Debt. The exchange also offers mutual fund distribution and other investment-related services.

4. Technology Infrastructure: NSE is known for its robust and advanced technology infrastructure that facilitates seamless trading and settlement processes. Its trading platform relies on high-speed and low-latency systems to ensure efficient order matching and execution.

5. Market Regulation; NSE, like other exchanges, adheres to strict market regulations set by SEBI. It enforces rules and regulations to maintain market integrity, transparency, and investor protection. NSE monitors trading activities, investigates unusual market movements, and takes appropriate actions to maintain market stability.

6. Listing and Membership: Companies interested in being listed on NSE need to fulfill specific listing requirements and comply with ongoing disclosure norms. NSE also regulates its members (brokers) who trade on the exchange by setting membership criteria and monitoring their activities.

7. Investor Education; NSE plays an active role in educating investors about various investment opportunities, financial literacy, and market-related concepts. It conducts workshops, seminars, and awareness programs to empower investors with knowledge.

8. Research and Development: NSE invests in research and development to enhance its services, improve trading systems, and introduce new products. Innovation is crucial to staying competitive and adapting to changing market dynamics.

9. International Relations; NSE maintains collaborations with other international stock exchanges and financial institutions to promote cross-border investments and knowledge sharing.

Question 11. Explain the Difference between NSE and BSE.
Answer: The table below highlights the main differences between NSE and BSE:

Question 12. IM What is MCX: Write its features and advantages.
Answer: The full form of MCX is the Multi Commodity Exchange of India Limited. MCX is India’s first commodity derivatives exchange facilitating online trading of commodity derivatives transactions. Commencing operations in 2003, MCX operates under the purview of the Securities and Exchange Board of India (SEBI).

Features of Trading in MCX:

1. Reputation and Standards: MCX is known for its good reputation in the Indian market, attributed to high-quality standards, transparent trading systems, and well-organized operations.

2. Vision and Purpose: MCX was formed with a vision to provide a robust and transparent platform for trading and clearing commodities in India.

3. Advanced Commodity Exchange: MCX is considered one of the most advanced commodity exchanges in the country, offering a technologically advanced platform for commodity trading.

4. Derivative Contracts: MCX is at the forefront of offering derivative contracts in commodities in India. It provides various types of contracts such as futures, options, swaps, and forwards, catering to different trading needs and strategies.

5. Infrastructure Development: MCX is committed to building a state-of-the-art infrastructure, aiming to set a benchmark for other exchanges in the region. This emphasis on infrastructure can contribute to the efficiency and reliability of the trading platform.

6. Regulation and Control: The derivatives market in India, including commodity trading, has faced challenges related to manipulation. Regulators, including the Securities and Exchange Board of India (SEBi}. have taken measures to control manipulative practices. This includes the closure of illegal trading activities to protect the interests of small-level traders.

Benefits of Trading in MCX:

1. Potential Returns: Several factors affect the prices of individual commodities such as supply and demand, inflation, and economy. Due to massive global infrastructure projects, demand has increased in the global infrastructure projects that impact commodity prices. A positive impact on the company stocks affects commodity prices.

2. Potential Hedge Against Inflation: Inflation can cause a hike in prices for commodities. During high inflation, commodities show strong performance, commodities are more volatile in comparison with other types of investments.

3. Diversified Investment Portfolio: A diversified investment portfolio refers to an ideal asset allocation plan. Commodities help in diversifying the investment portfolio. An investor can invest in raw materials in case you want to invest in stocks and bonds.

4. Transparency in the Process: Trading is a transparent process in. commodity futures that allows a fair price that is controlled by large-scale participation. It reflects different perspectives of a large number of people who deal with the commodity.

5. Profitable Returns: Commodities become riskier in the form of investments if the liquidity is high. This means that companies can experience both huge profits and heavy losses.

6. Cushioning against market fluctuations: Money requirement to buy commodity goods if the rupee becomes less valuable. During inflation, investors sell off stocks and bonds for investment in commodities. This leads to an increase in the prices of commodity goods.

7. Trading on Lower Margin: Traders can deposit 5 to 10% of the total contract value as a margin with the broker. This is less in comparison with other asset classes. Low margins allow individuals to invest and take larger positions at lesser capital.

Question 13. What is MCX? What are the Factors Influencing Commodity Prices in MCX?
Answer: The MCX was established in 2003 -g-Rd is headquartered in Mumbai. The exchange offers contracts for future delivery of a wide range of products, including:

1. Agricultural Products: Rice, Wheat, Soybean Oil, Soybean Meal, Cotton, Natural Gas, Crude Oil and Gold.

2. Metals; Aluminum, Copper, and Nickel.

3. Energy: Crude Oil and Natural Gas.

4. Currencies: South African Rand, Brazilian Real, and Mexican peso.

5. Softs: Coffee and Sugar.

Factors Influencing Commodity Prices: Commodity prices in MCX Trading, as well as other commodity markets, are subject to various influences. Here’s a simplified breakdown of the primary drivers:

1. Supply and Demand: At the core, it’s about balance. When demand for a commodity surpasses its supply, prices ascend. Conversely, when supply outpaces demand, prices decline. Think of it as the equilibrium of supply and demand in everyday life.

2. Weather Conditions: Nature wields significant influence, particularly in agricultural sectors. Droughts, floods, hurricanes, and other weather events can significantly impact crop yields. A prolonged drought, for instance, can devastate wheat crops, resulting in scarcity and higher wheat prices.

3. Geopolitical Events: Political instability and geopolitical conflicts in regions that produce commodities can disrupt supply chains. For instance, a civil war in a major oil-producing country can lead to reduced oil production and subsequent price hikes. Trade tensions between nations can also culminate in tariffs and restrictions affecting commodity flows.

4. Currency Movements: Commodities are often priced in currencies like the US dollar. Fluctuations in exchange rates can directly influence commodity prices. If the dollar strengthens against other currencies, it can elevate commodity costs for international buyers, potentially diminishing demand and causing price dips.

5. Economic Indicators: The broader economic landscape holds significance. A robust economy typically spurs demand for commodities as industries expand. Conversely, high inflation can erode currency values, rendering hard assets like commodities more appealing.

6. Technological Advancements: Technological progress can sway commodity prices. Innovations in production techniques can bolster supply. For instance, enhanced oil drilling methods can increase oil production, possibly prompting oil price reductions. Conversely, breakthroughs in renewable energy technologies can affect fossil fuel demand.

7. Speculation: Speculators and significant investors occasionally influence commodity prices through their trading activities. Their actions can generate short-term price swings when they anticipate impending price shifts.

Question 14. Define Trading. Write the Different Types of Trading.
Answer: In simple terms, trading refers to the buying and selling of stocks, bonds, commodities, currencies, or other financial securities for a short period to earn profits. The main difference between trading and traditional investing is the former’s short-term approach compared to the long-term horizon of the latter.

• Trading is mostly prevalent in the stock market as numerous people buy and sell shares of listed entities. The price of these shares changes every second and a trader can pick a favourable direction to make a gain.

Types of stock trading: There are eight primary types of trading.

1. Day trading: It involves buying and selling stocks in a single day. If the trader buys shares for intraday trading, they should also sell those at the end of the trading session. Day trading is famous for capitalizing on small movements of the stock’s NAV value. Intraday trading is a relatively low risk since the trader holds the position for a short time. However, the risk can increase if the trade uses too much margin money.

2. Scalping: It is also called micro-trading because of the time involved in the trade. The trader will make several short-duration trades to reap small profits. The number of scalp trading can go from a few dozen to a hundred daily. Similar to day trading, scalp trading requires an understanding of technical analysis, market knowledge, proficiency, and awareness of price trends.

3. Swing trading: Swing traders capitalize on short-term market trends and patterns. In swing trading, a trade can last for a few days – from one day to seven days. It involves analyzing the short-term trends to gauge market patterns to execute the transaction.

4. Momentum trading: In the case of momentum trading, traders capitalize on the stock’s momentum; and select scrips that are either breaking out or will break out. Traders will base their trading decisions on the direction of the trend. For example, the trader will sell for a higher profit if the ongoing momentum is upward. Conversely, when the movement is downward, the trading strategy is to buy stocks at a lower price.

5. Delivery trading: it is the most prevalent trading style in the stock market and one of the most secure ways of investing. Delivery trading is a form of long-term trading where the investors buy stocks intending to hold onto them for some time. Delivery trading doesn’t allow the usage of margin. This type of trading requires investors to pay the total amount to acquire the stocks. Particular types of stock trading

6. Positional trading: Positional trading is a form of delivery trading called the buy-and-hold strategy. It requires traders to maintain their position for an extended period and ignore the slightest market movements. Positional trading yields profit when the trade waits for a significant period before selling off.

7. Fundamental trading: Traders use fundamental analysis of the company to find stocks. They pay special attention to events related to the company and its financial details. Fundamental traders hold their positions sufficiently long to allow the stock price to move significantly. The trading style is quite close to stock investment.

8. Technical trading: Unlike fundamental traders, technical trading focuses on price trend analysis. They use charts and data to time the market. The risk involved in technical trading is higher than positional or fundamental trading. Traders should have market knowledge and the ability to study charts and graphs for insights.

9. Arbitrage Trading: Arbitrage trading is a style that takes advantage of price differences in. two or more markets or exchanges. This is reserved only for prime trading firms with a huge network as this doesn’t need many analytical skills but needs more network speed.

Question 15. Write about Different Trading Systems prevailing in the Indian Stock Market.
Answer: In the past, the trading on stock exchanges in India was based on an open outcry system. Under the system, brokers assemble at a central location usually the exchange trading ring, and trade with each other.

• This was time-consuming, and inefficient and imposed limits on trading volumes and trading hours. To provide efficiency, liquidity, and transparency, NSE introduced a nationwide online, fully automated screen-based trading system (SBTS).

Screen Based Trading System (SBTS):

1. Under this system a trading member can punch into the computer, the number of securities and the prices at which he would like to transact. The transaction is executed as soon as it finds a matching sell or buy order from a counterparty.
2. This system was readily accepted by market participants and in the very first year of its operation, NSE became the leading stock exchange in the country.
3. Technology has been used to carry the trading platform from the trading hall of stock exchanges to the premises of brokers. NSE carried the trading platform further to the PCs at the residence of investors through the Internet. This made a huge difference in terms of equal access to investors in a geographically vast country like India.
4. The trading system operates on a strict price-time priority. All orders received on the system are sorted with the best-priced order getting the priority for matching i.e., the best-buy orders match with the best-sell order. Similarly priced orders are sorted on a time priority basis, i.e. the one that came in early gets priority over the later one.
5. Orders are matched automatically by the computer keeping the system transparent, objective, and fair. Where an order does not find a match, it remains in the system and is displayed to the whole market, til! a fresh order comes in or the earlier order is canceled or modified. The trading system provides tremendous flexibility to the users in terms of the kinds of orders that can be placed on the system.
6. The trading system also provides complete market information online. The market screen at any point in time provides complete information on total order depth in a security, the five best buys and sells available in the market, the quantity traded during the day in that security, the high and the low, the last traded price, etc.
7. Investors can also know the fate of the orders almost as soon as they are placed with the trading members. Thus, the National Exchange for Automated Trading (NEAT) system provides an Open Electronic Consolidated Limit Order Book (OECLOB).
8. Limit orders are orders to buy or sell shares at a stated quantity and price. If the price-quantity conditions do not match, the limit order will not be executed. The term ‘limit order book’ refers to the fact that only limit orders are stored in the book and all market orders are crossed against the limit orders sitting in the book. Since the order book is visible to all market participants, it is termed as an ‘Open Book’.
9. Advantages of the Screen-Based Trading System (SBTS): x It electronically matches orders on a strict price/time priority and hence cuts down on time, cost, and risk of error, as well as on fraud resulting in improved operational efficiency.
10. It allows faster incorporation of price-sensitive information into prevailing prices, thus increasing the informational efficiency of markets.
11. It enables market participants, irrespective of their geographical locations, to trade with one another simultaneously, improving the depth and liquidity of the market.
12. It provides full anonymity by accepting orders, big or small, from members without revealing their identity, thus providing equal access to everybody.
13. It also provides a perfect audit trail, which helps to resolve disputes by logging in the trade execution process in its entirety.

NEAT System:

1. NSE is the first exchange in the world to use satellite communication technology for trading. Its trading system, called National Exchange for Automated Trading (NEAT), is a state-of-the-art client server-based application.
2. At the server end, all trading information is stored in an in-memory database to achieve minimum response time and maximum system availability for users.
3. It has an uptime record of 99.7%. For all trades entered into the NEAT system, there is uniform response time of less than one second. The NEAT system supports an order-driven market, wherein orders match based on time and price priority.
4. All quantity fields are in units and prices are quoted in Indian Rupees. The regular lot size and tick size for various securities traded are notified by the Exchange from time to time.

Question 16. Explain about the Screen-based trading system.
Answer: Screen-based trading refers to the method of buying and selling financial instruments, such as stocks or derivatives, using computer screens and electronic trading platforms. This form of trading has largely replaced traditional open outcry or floor trading where traders physically gathered on a trading floor to conduct transactions.

Screen-Based Trading Process: Screen-based trading, also known as electronic trading, involves the use of electronic platforms to facilitate the buying and selling of financial instruments. Here’s a general overview of the process:

1. Order Placement: Traders log in to their trading accounts on an electronic trading platform provided by a brokerage or exchange. They enter details of the trade, such as the instrument, quantity, price, and order type (market, limit, etc.)

2. Order Routing: The trading platform receives the order and electronically routes it to the appropriate exchange or market where the instrument is listed.

3. Order Matching: At the exchange, the order is matched with opposing orders based on price and other parameters. This is typically done through an order book that displays the buy and sell orders in real-time.

4. Trade Execution: When a buy and a sell order match, a trade is executed. The exchange confirms the trade and updates the relevant parties’ accounts.

5. Confirmation: Traders receive electronic trade confirmations that provide details about the executed trade, including the price, quantity, and execution time.

6. Market Data: Traders have access to real-time market data, including bid and ask prices, historical price charts, -and. order book information. This data helps inform trading decisions.

7. Account Updates: The trader’s account balance, holdings, and trade history are automatically updated in real-time based on executed trades.

Merits of Screen-Based Trading:

1. Efficiency: Screen-based trading is faster and more efficient than traditional open outcry methods. Orders can be placed and executed quickly, reducing the time it takes to complete a trade.

2. Accessibility: Traders can participate from anywhere with an internet connection, democratizing access to financial markets. This eliminates the need for physical presence on trading floors.

3. Transparency: The electronic platform provides real-time access to market data and trade executions. This transparency allows traders to make informed decisions based on current market conditions.

4. Reduced Costs: Electronic trading often has lower transaction costs compared to traditional methods. Fewer intermediaries are involved, leading to reduced brokerage fees and other charges.

5. Global Reach: Traders can access various markets and exchanges around the world from a single platform, enabling diversification and the ability to trade different financial instruments.

6. Automation: Screen-based trading enables the use of algorithmic trading strategies and automated systems. Traders can program rules for order execution and risk management.

7. Reduced Errors: Automation minimizes the potential for human errors that can occur in manual trading, leading to more accurate order placements and executions.

8. Market Data and Analysis: Electronic platforms offer advanced tools for market analysis, charting, technical indicators, and research, aiding informed decision-making.

9. Flexibility: Traders can place orders and manage portfolios at any time, including outside regular trading hours, accommodating different schedules.

10. Scalability: Online trading systems can handle a large number of orders simultaneously, allowing traders to scale up their activities efficiently.

11. Reduced Market Impact: Electronic trading can help reduce the market impact of large trades, as orders can be executed more discreetly through algorithms.

12. Quick Information Access: Traders can quickly access news, announcements, and relevant information that may impact their trading decisions, facilitating timely responses.

Question 17. Elucidate the Internet-Based Trading System.
Answer: Internet-based trading systems in stock exchanges refer to platforms that allow investors to trade stocks and other financial instruments online through the Internet.

• These systems have revolutionized the way investors participate in the stock market by providing them with convenient access to trading and market information.
• In India, various stock exchanges, such as the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), offer internet-based trading platforms through registered brokers. These platforms allow investors to buy and sell stocks and other financial instruments online.

Key Steps in Internet-Based Stock Trading in India:

1. Opening an Account: Investors need to open a trading and demat account with a registered stockbroker. The trading account enables trading, while the Demat account holds securities in electronic form.

2. Access to Trading Platform: Once the account is opened and verified, investors are provided with login credentials to access the online trading platform provided by their chosen broker.

3. Placing Orders: Investors log in to the trading platform and enter their buy or sell orders. They specify the stock, quantity, price, and order type.

4. Order Execution: The trading platform sends the order to the stock exchange’s electronic trading system. The order is matched with existing orders on the exchange, and if conditions are met, the trade is executed.

5. Real-Time Information: Investors have access to real-time market data, stock prices, bid-ask spreads, historical charts, and news updates through the trading platform.

6. Confirmation and Settlement: After a trade is executed, investors receive immediate electronic trade confirmations. Settlement of funds and transfer of shares occurs through the demat and trading accounts.

7. Portfolio Management: investors can monitor their investment portfolios, review trade history, and track overall performance through the trading platform.

8. Research and Analysis: Many online trading platforms provide research tools, technical analysis, and market reports to aid investors in making informed decisions.

9. Security Measures: Security features such as two-factor authentication, encryption, and secure login protocols are commonly implemented to protect investors’ accounts and data.

10. Market Alerts and Notifications: Investors can set up alerts and notifications to receive updates on price movements, news, and other market events.

11. Customer Support: Online brokers offer customer support to assist investors with technical issues, trading-related inquiries, and account management.

12. Regulatory Compliance: Internet-based stock trading in India is regulated by the Securities and Exchange Board of India (SEBI), ensuring that brokers and platforms adhere to established rules and regulations.

Question 18. What is Dematerialisation? Write its process, benefits, and problems.
Answer: Dematerialisation is a process through which physical securities such as share certificates and other documents are converted into electronic format and held in a Demat Account.

Process of dematerialization:

1. Dematerialization starts with opening a Demat account. For Demat account opening, you need to shortlist a Depository Participant (DP) that offers Demat services
2. To convert the physical shares into an electronic/Demat form, a Dematerialization Request Form (DRF), which is available with the Depository Participant (DP), has to be filled in and deposited along with share certificates. On each share certificate, ‘Surrendered for Dematerialization’ needs to be mentioned
3. The DP needs to process this request along with the share certificates to the company and simultaneously to registrars and transfer agents through the depository
4. Once the request is approved, the share certificates in the physical form will be destroyed and confirmation of dematerialization will be sent to the depository
5. The depository will then confirm the dematerialization of shares to the DP. Once this is done, a credit in the holding of shares will be reflected in the investor’s account electronically
6. This cycle takes about 15 to 30 days from the submission of the dematerialization request
7. Dematerialization is possible only with a Demat account, therefore it is essential to learn how to open a Demat account to understand dematerialization

Benefits of dematerialization: There is a wide range of benefits of the dematerialization of securities. Some of them are as follows:

1. Reduction of Paperwork: Dematerialization eliminates the need for physical certificates, reducing the paperwork associated with traditional securities trading. This streamlines administrative processes, making them efficient and cost-effective.

2. Risk Reduction: Physical securities are susceptible to loss, theft, or damage. Dematerialization eliminates these risks as securities exist in electronic form, stored in a central depository, reducing the chances of fraud or mishandling.

3. Faster Settlement: Electronic trading and dematerialization facilitate quicker settlement of transactions. The settlement process is expedited as there is no physical movement of certificates, reducing the time required for the transfer of ownership.

4. Cost Savings: Dematerialization leads to cost savings for both investors and issuers. It reduces the expenses associated with printing, handling, and transporting physical certificates. Additionally, the overall transaction costs are lowered due to increased efficiency.

5. Increased Liquidity: Electronic trading platforms and dematerialization enhance market liquidity by providing a faster and more accessible means of buying and selling securities. This can attract more investors and contribute to a more dynamic market.

6. Easy Accessibility: Investors can access their dematerialized securities portfolio easily through online platforms. This accessibility enhances transparency and allows investors to manage their holdings more efficiently.

7. Automatic Corporate Actions: Dematerialization facilitates the automatic processing of corporate actions such as dividends, bonus issues, and rights offerings. This ensures that investors receive their entitlements in a timely and accurate manner.

8. Global Accessibility: Dematerialization allows investors to access and trade securities from anywhere in the world through electronic trading platforms, promoting global investment opportunities and diversification.

9. Efficient Record Keeping: Electronic records in dematerialized form are easier to maintain and retrieve. This enhances the accuracy and efficiency of record-keeping for both investors and financial institutions.

10. Reduced Frauds: The electronic nature of dematerialized securities reduces the risk of fraud and unauthorized activities. The secure systems and processes implemented in electronic trading platforms and depositories enhance the overall security of transactions.

Problems with dematerialization:

1. Technological Risks: Dematerialization relies heavily on technology. Any glitches, system failures, or cyber-attacks on the electronic infrastructure could disrupt the functioning of the dematerialization process, leading to potential risks for investors.

2. Dependence on Internet Connectivity: The accessibility and management of Demat accounts are dependent on Internet connectivity. In regions with unreliable or limited internet access, investors may face difficulties in executing transactions or accessing their accounts.

3. Costs for Small investors: While dematerialization reduces overall costs, small investors might find the charges associated with maintaining a Demat account and transaction fees relatively high compared to the value of their investments.

4. Lack of Awareness: Some investors, particularly in less developed or rural areas, may lack awareness or understanding of dematerialization. This can result in resistance to the transition from physical to electronic securities.

5. Physical Certificates for Unlisted Securities: In some cases, unlisted or privately issued securities may still be in physical form. Investors holding such securities may face challenges in dematerializing them, as the process is more straightforward for securities listed on recognized stock exchanges.

6. Risk of Unauthorized Access: Given the electronic nature of Demat accounts, there is a potential, risk of unauthorized access or hacking. Investors and service providers need to implement robust security measures to protect sensitive financial information.

Question 19. What do you mean by Demat Account? Write the features and Benefits of the Demat Account.
Answer: The Demat full form stands for a Dematerialised Account. Demat is a form of an online portfolio that holds a customer’s shares and other securities.

• A Demat account is used to hold shares and securities in an electronic (dematerialized) format. These accounts can also be used to create a portfolio of one’s bonds, ETFs, mutual funds, and similar stock market assets.
• Demat trading was first introduced in India in 1996 for NSE transactions. As per SEBI regulations, all shares and debentures of listed companies have to be dematerialized to carry out transactions in any stock exchange from 31st March 2019.

Features of Demat Account:

1. Easy Share Transfers: When buying or selling shares, investors can transfer their holdings quickly using an electronic Delivery Instruction Slip (e-DIS). Users can include all the information necessary for a transaction to go smoothly on these slips.

2. Freezing Demat Accounts: Owners of Demat accounts have the option, if necessary, to temporarily freeze their accounts. If one wants to stop unauthorized debits or credits from being made to a Demat account, this option may be helpful. The option to freeze securities held in the account up to a certain amount is also accessible.

3. Pledging Facility To Avail Loan: Several brokers offer loans secured by securities that the borrowers have in their Demat accounts. The account holders utilize these holdings as security when applying for loans.

4. Speed E-Facility; Users can send instruction slips electronically through the National Securities Depository Limited rather than handing them in to the DP. As a result, the process is quicker and more convenient.

5. Multiple Accessing Options: Demat accounts can be accessed in a variety of ways because they are managed electronically. Using a computer, smartphone, or other smart device connected to the Internet, User can access these accounts.

6. Corporate Benefits & Actions: The owners of Demat accounts are automatically eligible for any dividends, credits, or interest that the corporations offer to their investors. Additionally, all shareholders’ Demat accounts are automatically updated with information regarding company actions such as bonus issuance, right shares, or stock splits.

Benefits of Demat Account:

1. Easy Holding: Physical share certificate maintenance is a laborious task. Additionally, monitoring their performance is an additional duty. Holders of Demat accounts often find it easier to hold and manage all of their investments in a single account.

2. Lower Risks: Due to losses, thefts, or damages, trading physical certificates is dangerous. Additional dangers include phony securities and faulty deliveries. By establishing a Demat account, holders have the option of keeping all of their investments in electronic form, eliminating these dangers.

3. Reduced Costs: Physical certificates came with several extra expenditures, including stamp duty, handling fees, and other such charges. These extra charges are nullified with a Demat account.

4. Odd Lots: Before Dematerialisation, buying and selling of only fixed quantities was allowed. This presented a problem of odd lots. Demat accounts have resolved this problem.

5. Reduced Time: The time needed to complete a transaction has decreased as a result of the absence of documentation. The account holder can buy and sell securities more quickly and effectively thanks to Demat accounts.

Question 20. Discuss about clearing and settlement process prevailing in the Indian Stock Market.
Answer: The clearing process involves the determination of what the counterparties owe, and which counterparties are due to receive on the settlement date, following which the obligations are discharged by settlement.

• The clearing and settlement process involves three main activities clearing, settlement, and risk management.

The core processes involved in clearing and settlement include:

1. Trade Recording: The key details about the trades are recorded to provide the basis for settlement. These details are automatically recorded in the electronic trading system of the exchanges.

2. Trade Confirmation: Trades that are meant for settlement by the custodians are indicated with a custodian participant code, and the same is subject to confirmation by the respective custodian. The custodian is required to confirm the settlement of these trades on T+l day by the cut-off time of 1:00 pm.

3. Determination of Obligation: The next step is the determination of what the counterparties owe, and what the counterparties are due to receive on the settlement date.

• The NSCCL interposes itself as a central counterparty between the counterparties to trade and net the positions so that a member has a security-wise net obligation to receive or deliver a security, and has to either pay or receive funds.
• The settlement process begins as soon as the members’ obligations are determined through the clearing process. The settlement process is carried out by the clearing corporation with the help of clearing banks and depositories. The clearing corporation provides a major link between the clearing banks and the depositories.
• This link ensures the actual movement of funds as well as securities on the prescribed pay-in and pay-out day.

4. Pay-in of Funds and Securities: This requires the members to bring in their funds/securities to the clearing corporation. The CMs make the securities available in the designated accounts with the two depositories (the CM pool account in the case of the NSDL, and the designated settlement accounts in the case of CDSL).

• The depositories move the securities available in the poo! accounts to the pool account of the clearing corporation. Likewise, the CMs with funds obligations make the funds available in the designated accounts with the clearing banks.
• The clearing corporation sends electronic instructions to the clearing banks to debit the designated CMs’ accounts to the extent of the payment obligations.
• The banks process these instructions, debit the accounts of the CMs, and credit the accounts of the clearing corporation. This constitutes the pay-in of funds and securities.

5. Pay-out of Funds and Securities: After processing for shortages of funds/securities and arranging for the movement of funds from surplus banks to deficit banks through RBI clearing, the clearing corporation sends electronic instructions to the depositories/clearing banks to release the pay-out of securities/funds.

• The depositories and clearing banks debit the accounts of the clearing corporation and credit the accounts of CMs. This constitutes the payout of funds and securities.

Question 21. Write about Different Types of Settlements in the Security Market.
Answer: Trade settlement is a two-way process that comes in the final stage of the transaction. Once the buyer receives the securities and the seller gets the payment for the same, the trade is said to be settled.

• While the official deal happens on the transaction date, the settlement date is when the final ownership is transferred.
• The transaction date never changes and is represented with the letter T. The final settlement does not necessarily occur on the same day. The settlement day is generally T+2.

Different types of Settlements: There are types of settlements in the stock market. Settlement is the final stage related to a trade order and can be categorized as follows:

• Spot Settlement; A spot settlement allows for a trade settlement immediately following the T+2 rolling settlement principal.
• Forward Settlement: A forward settlement might be used to settle a trade in the future on T+5 or T+7.

Rolling settlement: A rolling settlement is one in which the settlement is made in the successive days of the trade. In a rolling settlement, trades are settled on T+l day, which means deals are settled by the second working day.

• This excludes Saturdays and Sundays, bank holidays, and exchange holidays. So, if a trade is conducted on a Wednesday, it will be settled by Friday.
• The settlement day is essential for those investors who are looking to earn dividends. If the buyer wishes to receive a dividend from the company, then he must settle the trade before the record date for a profit.

Rolling settlement rules in BSE:

•  In the Bombay Stock Exchange (BSE), securities in the equity segment are all settled in T+2 days.
•  Government securities and fixed-income securities for retail investors are also settled in T+2 days.
• Pay-in and pay-out of monies and securities need to be completed on the same day.
• The delivery of securities and payment by the client has to be done within one working day after the BSE completes the payout of the funds and securities. the accounts of the clearing corporation and credit the accounts of CMs. This constitutes the payout of funds and securities.

Settlement cycle on the NSE:  The cycle for rolling settlements on the National Stok Exchange (NSE) is given below

Question 22. What is an auction? How it is initiated?
Answer: Auctions are initiated by the Exchange on behalf of trading members for settlement-related reasons. The main reasons are Shortages, Bad Deliveries, and Objections. There are three types of participants in the auction market.

1. Initiator: The party who initiates the auction process is called an initiator.
2. Competitor: The party who enters on the same side as the initiator is called a competitor.
3. Solicitor: The party who enters on the opposite side as of the initiator is called a solicitor.

• The trading members can participate in the exchange-initiated auctions by entering orders as a solicitors. For Example. If the Exchange conducts a Buy-In auction, the trading members entering sell orders are called solicitors.
• When the auction starts, the competitor period for that auction also starts. Competitor period is the period during which competitor order entries are allowed.
• Competitor orders are the orders which compete with the initiator’s order i.e. if the initiator’s order is a buy order, then all the buy orders for that auction other than the initiator’s order are competitor orders.
• And if the initiator order is a sell order then all the sell orders for that auction other than the initiators order are competitor orders.
• After the competitor period ends, the solicitor period for that auction starts. The solicitor period is the period during which solicitor order entries are allowed. Solicitor orders are the orders which are opposite to the initiator order i.e. if the initiator order is a buy order, then all the sell orders for that auction are solicitor orders and if the initiator order is a sell order, then all the buy orders for that auction are solicitor orders.
• After the solicitor period, order matching takes place. The system calculates trading price for the auction and all possible trades for the auction are generated at the calculated trading price. After this, the auction is said to be complete. The competitor period and solicitor period for any auction are set by the Exchange.
• Auction Market (AU) Orders: The term AU stands for Auction in which orders are entered for Auction Market. Auctions are initiated by the Exchange on behalf of trading members for settlement-related reasons. The main reasons are Shortages, Bad Deliveries, and Objections.
• The auction period is initiated from 12:00 P.M. to 12:30 P.M. The matching process for auction orders in this book is initiated only at the end of the auction period. The auction ending period is between 12:30 P.M. and 1:00 P.M.
• Entering Auction Orders: Auction order entry allows the user to enter orders into auctions that are currently running. To view the information about currently running auctions invoke the ‘Auction Enquiry’ screen.
• The user can do an auction order entry by entering ‘AU’ in the book type of the order entry screen. Symbol and Series that are currently selected in any of the market information windows (i.e. MW) provides the defaults in the auction order entry screen.
• Auction Order Modification: The user is not allowed to modify any auction orders.
• Auction Order Cancellation: The user can cancel any solicitor order placed by him in any auction provided the solicitor period for that auction is not over.
• The order cancellation procedure is similar to that of the normal market. The user can also use the quick order cancellation key to cancel his outstanding auction orders.
• Auction Order Matching: When the ‘solicitor period’ for an auction is over, auction order matching, starts for that auction. During this process, the system calculates the trading price for the auction based on the initiator order and the orders entered during the competitor and the solicitor period.
• At present for exchange-initiated auctions, the matching takes place at the respective solicitor order prices.
• Example: Auction is held in XYZ for 5,000 shares. The closing price of XYZ on that day was RS. 155. The last traded price of XYZ on that day was Rs.150.
• The price of XYZ last Friday was RS. 151. The previous day’s close price of XYZ was RS. 160. What is the maximum allowable price at which the member can put a sell order in the auction for XYZ? (The price band applicable for the auction market is +/- 20%)
• Maximum price applicable in auction = Previous day’s close price x (100+price band) = RS. 160×1.20 = RS. 192
• Minimum price applicable in auction = Previous day’s close price x (100-price band)

Question 23. Write about different types of Order Books.
Answer: As and when valid orders are entered or received by the trading system, they are first numbered, time-stamped, and then scanned for a potential match.

• This means that each order has a distinctive order number and a unique time stamp on it. If a match is not found, then the orders are stored in the books as per the price/time priority.
• Price priority means that if two orders are entered into the system, the order having the best price gets the higher priority.
•  Time priority means if two orders having the same price are entered, the order that is entered first gets the higher priority. The best price for a sell order is the lowest price and for a buy order, it is the highest price.

The different order books in the NEAT system are as detailed below:

1. Pre-open Book: An order during the Preopen session has to be a Preopen (PO) order. All the Preopen orders are stacked in the system till the Preopen phase. At the end of the Pre-open phase, the matching of Pre-open orders takes place at the Final Opening Price.

• By default, the Preopen (PO) book appears in the order entry screen when the Normal Market is in Preopen and the security is eligible for Preopen Session. Order entry in open book type is allowed only during market status is in pre-open.

2. Regular Lot Book: An order that has no special condition associated with it is a Regular Lot order. When a dealer places this order, the system looks for a corresponding Regular Lot order existing in that market (Passive orders).

• If it does not find a match at the time it enters the system, the order is stacked in the Regular Lot book as a passive order. By default, the Regular Lot book appears in the order entry screen in the normal market. The Regular Lot Book contains all regular lot orders that have none of the following attributes attached to them.

1. All or None (AON)
2. Minimum Fill (MF)
3. Stop Loss (SL)

3. Special Terms Book: Orders that have a special term attribute attached to them are known as special terms orders. When a special term order enters the system, it scans the orders existing in the Regular Lot book as well as the Special Terms Book. Currently, this facility is not available in the trading system. The Special Terms book contains all orders that have either of the following terms attached:

• All or None (AON)
• Minimum Fill (MF)

4. Negotiated Trade Book: The Negotiated. The trade book contains all negotiated order entries captured by the system before they have been matched against their counterparty trade entries. These entries are matched with identical counterparty entries only. It is to be noted that these entries contain a counterparty code in addition to other order details.

5. Stop-Loss Book: Loss orders are stored in this book till the trigger price specified in the order is reached or surpassed. When the trigger price is reached or surpassed, the order is released in the Regular lot book. The stop loss condition is met under the following circumstances:

• Sell Order: A sell order in the Stop loss book gets triggered when the last traded price in the normal market reaches or falls below the trigger price of the order.
• Buy Order: A buy order in the Stop Loss book gets triggered when the last traded price in the normal market reaches or exceeds the trigger price of the order.

6. Odd Lot Book: The Odd lot book contains all odd lot orders (orders with quantities less than the marketable lot) in the system. The system attempts to match an active odd lot order against passive orders in the book. Currently, according to a SEBI directive, the Odd Lot Market is being used for orders that have a quantity less than or equal to 500 (Qty more than the market lot) for trading. This is referred to as the Limited Physical Market (LPM).

7. Spot Book: The Spot lot book contains all spot orders (orders having only the settlement period different) in the system. The system attempts to match an active spot lot order against the passive orders in the book. Currently, the Spot Market book type is being used for conducting the Automated Lending & Borrowing Mechanism (ALBM) session.

8. RETDEBT Order Book: RETDEBT market orders can be entered into the system by selecting the RETDEBT Order book. These orders scan only the RETDEBT Order book for potential matches. If no suitable match can be found, the order is stored in the book as a passive order. To enter orders in the RETDEBT market, select the book type as ‘D’.

9. Auction Book: This book contains orders that are entered for all auctions. The matching process for auction orders in this book is initiated only at the end of the solicitor period.

Question 24. What are the order types and various conditions attached to it?
Answer: A Trading Member can enter various types of orders depending upon his/her requirements. These conditions are broadly classified into three categories: time-related conditions, price-related conditions, and quantity-related conditions.

1. Time Conditions:

• DAY: A Day order, as the name suggests, is an order that is valid for the day on which it is entered. If the order is not matched during the day, the order gets canceled automatically at the end of the trading day.
• GTC: A Good Till Cancelled (GTC) order is an order that remains in the system until it is canceled by the Trading Member. It will therefore be able to span trading days if it does not get matched. The maximum number of days a GTC order can remain in the system is notified by the Exchange from time to time.
• GTD: A Good Till Days/Date (GTD) order allows the Trading Member to specify the days/date up to which the order should stay in the system. At the end of this period, the order will get flushed from the system. Each day/date counted is a calendar day and inclusive of holidays. The days/dates counted are inclusive of the day/date on which the order is placed. The maximum number of days a GTD order can remain in the system is notified by the Exchange from time to time.
• IOC: An Immediate or Cancel (IOC) order allows a Trading Member to buy or sell a security as soon as the order is released into the market, failing which the order will be removed from the market. A partial match is possible for the order, and the unmatched portion of the order is canceled immediately.

2. Price Conditions

• Limit Price/Order: An order that allows the price to be specified while entering the order into the system.
  Market Price/Order: An order to buy or sell securities at the best price obtainable at the time of entering the order.
• Stop Loss (SL) Price/Order: The one that allows the Trading Member to place an order that gets activated only when the market price of the relevant security reaches or crosses a threshold price. Until then the order does not enter the market.
• Sell Order: A sell order in the Stop Loss book gets triggered when the last traded price in the normal market reaches or falls below the trigger price of the order.
• Buy Order: A buy order in the Stop Loss book gets triggered when the last traded price in the normal market reaches or exceeds the trigger price of the order,For Example, If for a stop loss buy order, the trigger is Rs. 93.00, the limit price is Rs. 95.00 and the market (last traded) price is Rs. 90.00, then this order is released into the system once the market price reaches or exceeds Rs. 93.00. This order is added to the regular lot book with a time of triggering as the time stamp, as a limit order of Rs. 95.00

3. Quantity Conditions: Disclosed Quantity (DQ): An order with a DQ condition allows the Trading Member to disclose only a part of the order quantity to the market. For example, an order of 1000 with a disclosed quantity condition of 200 will mean that 200 is displayed to the market at a time.

• After this is traded, another 200 is automatically released, and so on till the full order is executed. The Exchange may set a minimum disclosed quantity criteria from time to time.

Minimum Fill (MF): MF orders allow the Trading Member to specify the minimum quantity by which an order should be filled. For example, an order of 1000 units with a minimum fill of 200 will require that each trade be for at least 200 units. In other words, there will be a maximum of 5 trades of 200 each or a single trade of 1000. The Exchange may lay down norms of MF from time to time.

AON: All or None orders allow a Trading Member to impose the condition that only the full order should be matched against. This may be by way of multiple trades. If the full order is not matched it will stay in the books till matched or cancelled.

Stock Exchanges Short Answer Questions

Question 1. Bombay Stock Exchange (BSE).
Answer: BSE full form stands for Bombay Stock Exchange. It is the oldest stock exchange in India as well as Asia. Bombay Stock Exchange was established by Premchand Roychand in 1875 and is currently headed by <. Shri Sundararaman Ramamurthy (Managing Director & CEO).

• The Bombay Stock Exchange is one of the largest securities markets. It is located on Dalai Street, Mumbai, and lists over 6000 companies.
• BSE has contributed significantly to developing and shaping India’s capital markets. Through BSE, investors get the opportunity to trade in equities, mutual funds, debt instruments, etc.
• It also offers capital market trading services that include investor education, risk management, clearing, settlement, and many more.

Question 2. How do NSE And BSE work?
Answer: Both NSE and BSE have mostly similar trading mechanisms, as both allow investors and traders to connect on the exchanges through brokers. Investors can place buy or sell orders on either of these exchanges.

• The indices of NSE and BSE, ‘Nifty’ and ‘Sensex’ respectively, indicate the health of stocks listed on these exchanges. Considering the scale of each of these exchanges, their indices also indicate the overall economic health of the Indian markets.
• If a company plans to raise money through investors, it must get registered with a recognized stock exchange through an IPO. The company can then offer shares at a particular price to investors who wish to buy them to become shareholders of the company.
• If the company performs well, it can declare dividends for shareholders as per the shares held. As it grows, the company can attract more investors, and therefore more shares can be issued. All such transactions can be carried out in the stock markets through a stock exchange, such as NSE or BSE.

Question 3. Similarities between NSE and BSE.
Answer: The following are the Similarities between NSE and BSE:

1. Listing and Trading: Both NSE and BSE allow companies to list their shares for trading. Listed companies are subject to regulatory requirements and transparency standards set by the respective exchanges.
2. Regulatory Oversight: The Securities and Exchange Board of India (SEBI), the country’s securities market regulator, regulates both BSE and NSE. SEBI ensures that both exchanges adhere to fair trading practices, investor protection guidelines, and market integrity.
3. Financial Instruments; Both exchanges offer a wide range of financial instruments. Even beyond equities, including bonds, derivatives, exchange-traded funds (ETFs), and mutual funds. This diversity allows investors to engage in various investment strategies and asset BSE classes.
4. Electronic Trading: Both NSE and BSE have adopted electronic trading systems to facilitate efficient and transparent trading.
5. Popularity: Both are quite popular.
6. Trading Hours: Both exchanges have similar trading hours. The market opens at around 9:15 AM and closes at 3:30 PM, Monday to Friday, excluding market holidays.

Question 4. How has NSE become more popular than BSE?
Answer: Over time, NSE beat the BSE to become the leading stock exchange in India due to several reasons listed below:

1. Technology: NSE’s advanced and reliable technology infrastructure enabled faster and more efficient trading than BSE.
2. Products: NSE offered a more comprehensive range of financial products, including derivatives, which attracted more investors and traders.
3. Transparency: NSE strongly focused on transparency and disclosure, which instilled investor confidence and helped prevent fraudulent activities.
4. Liquidity: NSE was known for higher liquidity levels, which meant more trading activity and higher trading volumes, making it easier for investors to buy and sell securities.
5.  Efficiency: NSE introduced several measures to increase efficiency, such as market-wide circuit breakers, which helped stabilize the market during times of volatility.
6. Regulatory environment: The Securities and Exchange Board of India (SEBI) introduced several measures favoring the NSE, such as allowing it to launch new products without prior approval, which helped the NSE grow faster than the BSE.

Question 5. Major Indices in BSE.
Answer: The Bombay Stock Exchange (BSE) has several indices that provide a snapshot of the overall performance of the Indian stock market. The major indices of the BSE include:

1. BSE Sensex: The BSE Sensex is the flagship index of the BSE and comprises 30 of the largest and most actively traded stocks on the exchange. It is India’s benchmark stock market index and is widely tracked by investors, analysts, and the media as a barometer of the Indian economy.
2. BSE 500: The BSE 500 index comprises 500 companies listed on the BSE and is a broader indicator of the Indian stock market. It includes companies from various sectors and is useful for investors who want to track the overall performance of the Indian stock market.
3. BSE Midcap; The BSE Midcap index comprises companies with a market capitalization between Rs. 5 billion and Rs. 20 billion. It includes companies from various sectors and is useful for investors who are looking for exposure to mid-sized companies.
4.  BSE Smallcap: The BSE Smallcap index comprises companies with a market capitalization below Rs. 5 billion. It includes companies from various sectors and is useful for investors who are looking for exposure to small-sized companies.
5. BSE Bankex: The BSE Bankex index comprises banking and financial services companies listed on the BSE. It is a useful indicator of the performance of the banking sector.
6.  BSE Healthcare: The BSE Healthcare index comprises pharmaceutical and healthcare companies listed on the BSE. It is a useful indicator of the performance of the healthcare sector.

Question 6. What are the various investment methods in BSE?
Answer: The Bombay Stock Exchange (BSE) provides various investment methods for investors to invest in the Indian stock market. Some of the popular ones are:

1. Equity: Investing in equities is one of the most popular methods. Investors can buy shares of publicly traded companies listed on the BSE and earn returns in the form of dividends and capital appreciation.
2. Mutual Funds: Mutual funds are professionally managed investment funds that pool money from investors to invest in a diversified portfolio of stocks, bonds, and other securities. The BSE offers a platform for investors to invest in mutual funds.
3. Initial Public Offerings (IPOs): An IPO is a process by which a private company offers its shares to the public for the first time. The BSE provides a platform for companies to list their shares and for investors to invest in IPOs.
4. Exchange Traded Funds (ETFs): ETFs are investment funds that are listed and traded on stock exchanges like stocks. They track specific indices, such as the BSE Sensex or BSE Midcap index, and provide investors with exposure to a diversified portfolio of stocks.
5. Bonds: Investors can also invest in bonds listed on the BSE, which are issued by companies and governments to raise funds. Bonds provide investors with a fixed income stream in the form of interest payments.
6. Derivatives: Derivatives are financial instruments that derive their value from an underlying asset, such as stocks or indices. The BSE provides a platform for investors to trade in derivatives such as futures and options.

Question 7. How does the Bombay Stock Exchange work?
Answer: The Bombay Stock Exchange (BSE) is an electronic exchange that provides a platform for trading various financial instruments, including stocks, derivatives, and currencies.

• The BSE operates on a principle of price-time priority, where orders are executed based on the best available price and time of order placement. The exchange uses a sophisticated trading platform and order-matching system to ensure that orders are executed quickly and accurately.
• Moreover, the BSE has a regulatory framework that ensures transparency and fairness in trading activities. Listed companies must comply with stringent disclosure requirements, and the exchange regularly monitors trading activities to prevent market abuse and insider trading.
• Investors can access the BSE through brokerage firms or online trading platforms. They can place orders to buy or sell securities, which are executed by the exchange based on prevailing market conditions.

Question 8. NSE
Answer: The National Stock Exchange of India Limited (NSE) is the largest financial exchange in the Indian market. It was established in 1992 on the recommendation of the High-Powered Study Group, which was founded by the Indian government to provide solutions to simplify participation in the stock market and make it more accessible to all interested parties.

• In 1994, the NSE introduced electronic trading in the Indian stock exchange market.
• The National Stock Exchange of India Limited offers a platform to companies for raising capital. Investors can access equities, currencies, debt, and mutual fund units on the platform.
• In India, foreign companies can raise capital using the NSE platform through initial public offerings (IPOs), Indian Depository Receipts (IDRs), and debt issuances. The NSE also offers clearing and settlement services.

Question 9. Market Segments of NSE.
Answer: The National Stock Exchange of India is a multifaceted platform accommodating various trading activities through its multiple market segments. These segments are designed to cater to the diverse investment needs of the financial market. Here’s a detailed look:

1. Capital Market Segment: This is the most straightforward segment where equities or shares of companies are bought and sold. It is the primary venue for retail investors looking to invest in stocks.
2. Futures and Options Segment: This segment deals with derivative instruments. Traders can buy or sell futures or options contracts based on underlying assets like equities, commodities, or currencies.
3. Currency Derivatives Segment: This segment is dedicated to trading currency futures and options. It offers an opportunity for hedging against currency risk and is increasingly becoming popular among businesses and forex traders.
4. Wholesale Debt Market Segment: This segment is for institutional investors with high-value debt instruments. These include government bonds, corporate bonds, and other fixed-income securities.
5. Mutual Fund Service System (MFSS): This is a more recent addition, allowing for the electronic trading of mutual fund units. It makes investing in mutual funds easier and more efficient.
6.  Sovereign Gold Bonds (SGB) Segment: This segment allows trading in government-issued gold bonds, providing an alternative to physical gold investment.
7. Indices: The National Stock Exchange also offers various indices like NIFTY 50, which track the performance of a specific set of companies or sectors, serving as indicators for market trends.

Question 10. How Does the National Stock Exchange Work?
Answer: Trading through this stock exchange in India is carried out through an electronic limit order book, where order matching takes place through a trading computer. This entire process does not have the interference of specialists or market makers and is driven entirely by orders. The working process in NSE is as follows:

1. Opening the Market: The NSE starts its trading day with a pre¬open session to discover the opening price of securities. The main trading session follows this.
2. Order Placement: Investors place buy or sell orders through their brokerage accounts. These orders are then sent to the NSE’s electronic trading system.
3. Matching and Execution: The NSE’s automated system matches buy and sell orders based on price and time priority. Once a match is found, the trade is executed.
4. Real-Time Updates: All trading activities and price changes are updated in real time, providing constant information to investors.
5. Clearing and Settlement: After the trading day ends, the NSE’s clearing corporation steps in to handle the clearing and settlement of all trades. This includes transferring the sold securities and the corresponding funds between the buying and selling parties.
6. Regulatory Oversight: The National Stock Exchange ensures compliance with all the regulatory requirements throughout this process. It employs robust risk management systems and surveillance mechanisms to monitor trading activities.
7. Data Dissemination: Post-trading, NSE disseminates market data, including the closing prices of securities, trading volumes, and other relevant information, which is crucial for investors and market analysts.
8. Closing the Market: The market closes with a session that again determines the closing price of the securities based on the day’s trading activities.

Question 11.  Investment Segments in NSE.
Answer: The following are the various investment segments available in NSE:

1. Equity Investments: NSE offers a robust platform for trading in equities, providing retail and institutional investors an opportunity for capital growth.
2. Debt Instruments: For conservative investors, the National Stock Exchange provides a segment for trading in government bonds, corporate bonds, and other fixed-income securities.
3. Derivatives: NSE has an extensive Futures and Options segment for those interested in hedging or speculative trading.
4. Currency Trading: With the Currency Derivatives segment, investors can trade in currency futures and options, offering a hedge against forex volatility.
5. Commodities: NSE has introduced commodity derivatives, allowing investors to trade in gold, silver, and agricultural commodities.
6. Mutual Funds: The Mutual Fund Service System (MFSS) allows for the electronic trading of mutual fund units, making it easier for retail investors to diversify their portfolios.
7. Indices: Investment in index-based products like Exchange Traded Funds is also facilitated by the National Stock Exchange, providing a simpler way to invest in a diversified portfolio.
8. Sovereign Gold Bonds: For those interested in gold investments without the need to hold physical gold, NSE provides a platform for trading in Sovereign Gold Bonds.

Question 12. Major Indices in NSE.
Answer: In the Indian financial market, the National Stock Exchange (NSE) has introduced several indices that serve as key performance indicators for various sectors and the market.

• These indices are crucial for investors, policymakers, and financial analysts as they offer insights into market trends and economic conditions.

Following are some of the major indices in this exchange system:

1. NIFTY 50: The most popular, NIFTY 50 tracks the performance of the top 50 companies listed on the National Stock Exchange. It serves as a broad indicator of the Indian stock market and is used extensively for benchmarking portfolios.
2. NIFTY Next 50: This index represents 50 companies from NIFTY 100 after excluding the NIFTY 50 companies. It indicates the performance of the next rung of blue-chip companies.
3. NIFTY Bank: This index is designed to reflect the behavior of banking stocks and is crucial for tracking the performance of the banking sector in India.
4. NIFTY IT: Representing the Information Technology sector, this index includes top IT companies and indicates the sector’s health.
5. NIFTY Pharma: This index focuses on pharmaceutical companies, reflecting the performance of India’s booming pharmaceutical industry.
6. NIFTY Auto: This index covers companies related to the automobile sector, offering insights into this critical segment of the Indian economy.
7.  NIFTY Metal: Aimed at tracking the metal sector, this index includes companies involved in mining, metal production, and other related activities.
8.  NIFTY FMCG: Representing the Fast-Moving Consumer Goods sector, this index is often seen as an indicator of consumer sentiment and spending.
9. NIFTY Midcap & Smallcap Indices: These indices focus on medium and small-sized companies, providing a glimpse into the performance of emerging businesses and sectors.

Question 13. Listing Requirments In NSE
Answer: There are certain requirements imposed by the National Stock Exchange to list the securities, as follows.

1. A company has to apply for listing securities in the prescribed form.
2. Already listed companies should also apply for further issue of securities.
3. 1% of the amount of securities offered for subscription to the public, should be kept as a deposit and 50% of it should be deposited in cash. And the balance can be in the form of a bank guarantee.
4. For IPOs, the minimum paid-up capital should be Rs. 20 crores.
5. The paid-up equity capital for existing companies should be not less than Rs. 10 crores and market capitalization of the applicant’s equity should be either Rs. 25 crores or Rs. 50 crores.
6. To accommodate hi-tech companies going public, the paid-up equity capital shall be not less than Rs. 5 crores.
7. The capitalization at the time of issue is not less than Rs. 50 crores.
8. There should be a 3-year track record for listing in NSE, out of which at least dividends should have been paid for one year.

Question 14. Promoters of the National Stock Exchange.
Answer: The following are the Leading Financial Institutions that promoted the

National Stock Exchange:

1. Industrial Development Bank of India
2. Industrial Finance Corporation of India
3. Industrial Credit and Investment Corporation of India
4. Life Insurance Corporation of India
5. General Insurance Corporation of India
6. SB1 Capital Markets Limited
7. Stock Holding Corporation of India Ltd

Question 15. Infrastructural Leasing and Financial Services Ltd
Answer: MCX, or Multi Commodity Exchange, is India’s first recognized exchange for commodities. It was founded in 2003, is owned by the Ministry of Finance, and is governed by the Securities and Exchange Board of India (SEBI). MCX accounts for roughly 60% of the country’s total commodity futures trading volume.

The services available with this e-exchange include:

1. Over-the-counter (OTC) trading
2. Commodity derivatives trading
3. Futures trading
4. Options trading
5. Domestic & international trade financing
6. Mining services

Question 16. What are the factors considered when trading in Commodities in India?
Answer: The following are the key aspects to consider when trading in Commodities in India:

1. Diversification: Investment entails growing your wealth by allocating it across diverse assets. Traditionally, stocks and bonds dominated investment portfolios. However, commodities such as gold, oil, and agricultural products offer a distinctive proposition.

• They often move independently of stocks and bonds. Thus, when stocks experience a downturn, commodities may show a different trend, potentially mitigating losses and enhancing overall portfolio equilibrium.

2. Hedging: Hedging mirrors insurance for businesses engaged in commodity production or utilization. Picture a wheat farmer apprehensive about a drop in wheat prices before the harvest.

• To shield against unpredictable price swings, they resort to MCX Trading. By entering into futures contracts, they lock in a predetermined price for their wheat.
• This strategy shields them from market price fluctuations, ensuring cost predictability in their operations and preserving profitability.

3. Speculation; Unlike hedging, which seeks to mitigate risk, speculation embraces risk to reap rewards potentially. Traders and investors enter MCX Trading to capitalize on commodity price fluctuations.

• For instance, if you anticipate an upswing in crude oil demand due to economic or geopolitical factors, you can acquire oil futures contracts. Speculation in commodities offers the potential for significant returns but entails higher risk due to market price unpredictability.

Question 17. Difference Between Stock market And Commodity Market
Answer:

Question 18. What is an MCX Trading Account?
Answer: The MCX trading account is an account that helps you to buy and sell different commodities like agricultural, energy, metal, and others on the MCX. However, they can be cash-settled or physically settled.

• To open a trading account in MCX, a trader must keep aside some margin money in their account. This margin money acts as a security, especially for the broker, to compensate for any considerable loss.

There are types of margins in MCX trading:

1. Initial Margin: Initial margin means the minimum amount of money a trader has to deposit in its MCX Demat account to start trading.
2. M2M Margin: The M2M margin means a Mark-to-market margin in which profit or loss in a trading day is adjusted each day. If a trader has accumulated profit, the money is directly transferred to their trading account by the clearinghouse.
3. Special Margin: The special margin is collected by traders to set off excessive speculation and to control the volatility. A trader must note that they will get a margin amount between 5% to 10% of the contract value of the commodity.

Question 19. NEAT System.
Answer: NSE is the first exchange in the world to use satellite communication technology for trading. Its trading system, called National Exchange for Automated Trading (NEAT), is a state-of-the-art client server-based application.

1. At the server end, all trading information is stored in an in-memory database to achieve minimum response time and maximum system availability for users. It has an uptime record of 99.7%. For all trades entered into the NEAT system, there is a uniform response time of less than one second.
2. The NEAT system supports an order-driven market, wherein orders match based on time and price priority. Ali quantity fields are in units and prices are quoted in Indian Rupees. The regular lot size and tick size for various securities traded are notified by the Exchange from time to time.

Question 20. Trading System Users.
Answer: The trading member has the facility of defining a hierarchy amongst its users of the NEAT system. The users of the trading system can log in as either of the user types. The significance of each type is explained below:

1. Corporate Manager: The corporate manager is a term assigned to a user placed at the highest level in a trading firm. Such a user receives the end-of-day reports for all branches of the trading member.

• The facility to set branch order value limits and user order value limits is available to the corporate manager. The corporate manager also has the facility to set a symbol-wise user order quantity limit. He can view outstanding orders and trades of all users of the trading member and can also cancel/modify outstanding orders of all users of the trading member.

2. Branch Manager: The branch manager is a term assigned to a user who is placed under the corporate manager. The branch manager receives end-of-day reports for all the dealers under that branch. He can set user order value limits for each of his branches. He can view outstanding orders and trades of all users of his branch and can also cancel/modify outstanding orders of all users of his branch.

3. Dealer: Dealers are users at the lowest level of the hierarchy. A dealer can view and perform order and trade-related activities only for himself and does not have access to information on other dealers under either the same branch or other branches.

Question 21. Working of the Demat System.
Answer: The working of the Demat System is given below:

• A depository participant (DP), either a bank, broker, or financial services company, may be identified.
• An account opening form and documentation (PAN card details, photograph, power of attorney) may be completed.
• The physical certificate is to be given to the DP along with a dematerialization request form.
• If shares are applied in a public offer, simple details of DP and demat account are to be given and the shares on allotment would automatically be credited to the demat account.
• If shares are to be sold through a broker, the DP is to be instructed to debit the account with the number of shares.
• The broker then gives instructions to his DP for delivery of the shares to the stock exchange.
• The broker then receives payment and pays the person for the shares sold.
• All these transactions are to be completed within 2 days, i.e., delivery of shares and payment received from the buyer is on a T+2 basis, settlement period.

Question 22. What is the Procedure for Opening a Demat Account?
Answer: Here is the account opening process for a Demat account

• Firstly, decide where you want to open the demat account. Then choose a DP you want to open the Demat account with. You can find many financial institutions and brokerages offering this service.
• Fill up the account opening form and submit it along with the. copies of all the necessary documents and a passport-size photo.
• Have original documents handy for verification.
• You will receive a copy of the terms and conditions agreement. Go through it.
• A member of DP will get in touch with you and verify the details you have submitted.
• Upon successful processing, you will get a Demat account number along with a client ID which you can use for the account online.
• You need to pay some account opening charges such as the annual maintenance charge and the transaction fee (monthly basis). The fee differs from one to another Depository Participant.
• There is no limit on the minimum number of securities to keep your account active.

Question 23. Types of Demat account.
Answer: in India, the three major types of Demat accounts offered by Depository Participants (DPs) are as follows:

•  Regular Demat Account: This is the standard type of Demat account available to individual investors. It is used for holding and trading in a wide range of financial instruments such as equities, bonds, debentures, and mutual fund units, investors can buy and sell securities through the stock exchanges using this account.
• Repatriable Demat Account: This type of Demat account is designed for Non-Resident Indians (NRIs) who want to invest in the Indian stock market. It allows NRIs to repatriate the funds back to their country of residence along with the capital gains earned from the investments. The funds held in this account are in Indian Rupees, and it is linked to the investor’s Non-Resident External (NRE) bank account.
• Non-Repatriable Demat Account: Similar to the Repatriable Demat Account, the Non-Repatriable Demat Account is also for NRIs. However, the funds held in this account cannot be repatriated, meaning they cannot be taken out of India. It is linked to the investor’s Non¬Resident Ordinary (NRO) bank account.

Question 24. De-mat Settlement.
Answer: In a demat settlement, securities are held electronically in a demat account, eliminating the need for physical share certificates.

Demat settlement process:

1. Trade Execution: The process begins with the execution of a trade on the stock exchange, where buyers and sellers agree on a transaction.
2.  Clearing and Confirmation (T+l): After the trade execution, clearing and confirmation take place on the first working day (T+l). This involves the confirmation of trades, and the clearinghouse validates the details of the transactions.
3. Securities and Funds Pay-in and Pay-out (T+2): On the second working day (T+2), the actual settlement occurs. Securities are electronically transferred from the seller’s demat account to the buyer’s demat account. Simultaneously, funds are transferred from the buyer to the seller through the banking system.
4. Post-Settlement Activities (T+3 and beyond): Any post-settlement activities, such as rectification of bad deliveries or resolution of discrepancies, may continue in the subsequent days.

Question 25. What is Physical Settlement?
Answer: In a Stock F&O contract, when there is an open position that has not been squared off by its expiry date, physical settlement takes place. This implies they have to physically give/take delivery of Stocks to settle the open transactions instead of settling them with cash.

• In a physical settlement, the seller has to physically deliver the stocks to the buyer at the end of the expiration date. In a physical settlement, the following transactions take place:

1. Taking Delivery: A buyer can take the delivery of the stocks after the expiration date. The stocks are credited to his Demat account. In this case, the contracts are Long ITM (In-the-money) call, Long ITM put, and Long Futures.

2. Giving Delivery: A seller has to deliver the stocks after the expiration date to the buyer. The stocks are debited from his Demat account and are credited to the Demat account of the seller. In this case, the contracts are Short ITM (In-the-money) call, Short ITM put, and Short Futures.

Benefits of Physical Settlement:

• Here are the benefits of physical settlement in Futures and Options Trading:
• It is subject to negligible manipulation as the trade and the process of the physical settlement are closely monitored by the clearing exchange and the broker.
• It allows for the physical visibility of the underlying asset, allowing for more transparent price discovery.
• The physical settlement process is quick and simple to undertake. As most of the work is done by the stockbroker, the user doesn’t have to undertake cumbersome transactions.

Question 26. Pay-in and Pay-out day.
Answer: Pay-in day: Pay-in day is the day when the trading members/brokers are required to make payment of funds or delivery of securities to the clearing corporation of the Exchange for all transactions traded by or through them in the respective settlement period.

1. Securities Pay-in: The process of delivering securities to the clearing corporation to settle a sale transaction.

2. Funds Pay-in: The process of transfer of funds to the clearing corporation to pay for purchase transactions.

Pay-out day: Pay-out day is the day when the clearing corporation of the stock exchange transfers funds and securities to the broker/trading member who has a receivable obligation.

1. Securities Pay-out: The process of receiving securities from the clearing corporation to complete the securities settlement of a purchase transaction.

2. Funds Pay-out: The process of transfers of funds from the clearing corporation to complete the fund’s settlement of a sale transaction.

Question 27. Bad Delivery.
Answer: Bad deliveries (deliveries that are prima facie defective) are required to be reported to the clearing corporation within two days of the receipt of documents. The delivery member is required to rectify these within two days. Un-rectified bad deliveries are assigned to auction on the next day. This problem can arise only in the case of physical settlement.

Question 28. Short Delivery.
Answer: A short delivery/failed delivery takes place when a broker, a custodian, or the clearing corporation delivers fewer securities than what was contracted for either to another broker, a custodian, or the clearing corporation.

• On the securities pay-in day, the clearing member communicates to the clearing corporation about the securities that he will be able to deliver and those securities that he will not be able to deliver.
• Also informs an amount equivalent to the securities not delivered by him valued at the valuation price (the closing price on the day previous to the day of valuation).
• This is called valuation debit. A valuation debit is also conducted for bad delivery by clearing members. This problem can arise in the case of both physical and dematerialized settlement.

Question 29. Market Types.
Answer: The Capital Market system has four types of market:

1.  Normal Market: The normal market consists of various book types in which orders are segregated as Regular Lot Orders, Special Term Orders, and Stop Loss Orders depending on the order attributes.
2. Auction Market: In the auction market, auctions are initiated by the exchange on behalf of trading members for settlement-related reasons.
3.  Odd Lot Market: The odd lot market facility is used for the Limited Physical Market and the Block Trades Session.
4. Retail Debt Market: The RETDEBT market facility on the NEAT system of capital market segment is used for transactions in the Retail Debt Market session. Trading in the Retail Debt Market takes place in the same manner as in the equities (capital market) segment.

Question 30. Order Matching Rules.
Answer: The best-buy order is matched with the best sell order. An order may match partially with another order resulting in multiple trades. For order matching, the best buy order is the one with the highest price and the best sell order is the one with the lowest price.

• This is because the system views all buy orders available from the point of view of a seller and all sell orders from the point of view of the buyers in the market.
• So, of all buy orders available in the market at any point in time, a seller would like to sell at the highest possible buy price that is offered. Hence, the best buy order is the order with the highest price and the best sell order is the order with the lowest price.

Question 31. Order Modification.
Answer: All orders can be modified in the system till the time they do not get fully traded and only during market hours. Once an order is modified, the branch order value limit for the branch gets adjusted automatically.

Following is the corporate hierarchy for performing order modification functionality:

• A dealer can modify only the orders entered by him.
• A branch manager can modify his orders or the orders of any dealer under his branch.
• A corporate manager can modify his orders or orders of all dealers and branch managers of the trading member firm.

Question 32. Order Cancellation.
Answer: Order cancellation functionality can be performed only for orders that have not been fully or partially traded (for the untraded part of partially traded orders only) and only during market hours and in the pre-open period.

1. Single Order Cancellation: Single order cancellation can be done during trading hours either by selecting the order from the outstanding order screen or the function key provided. Order cancellation functionality is available for all book types. However, the user is not allowed to cancel auction initiation and competitor orders in the auction market.

2. Quick Order Cancellation: Quick Order Cancellation (Cancel All) is an extension of Single Order Cancellation enabling a user to cancel multiple outstanding orders in various trading books subject to the corporate hierarchy.

• The different filters available for canceling orders by using the quick order cancellation facility are the symbol, series, book type, branch, user, PRO/CLI, client account number and buy/sell.

3. Order Cancellation for Disabled Member: The Exchange suspends a member from trading due to various reasons. In case a member is suspended from trading by the Exchange, all pending orders in all books of the member are immediately canceled by the system.

• A message: “Order Number canceled due to suspension” is displayed on the message window screen at the trader workstation.

Question 33. Risks in Settlement.
Answer: The following two kinds of risks are inherent in a settlement system:

1. Counterparty Risk: This arises if parties do not discharge their obligations fully when due or at any time thereafter. This has two components, namely replacement cost risk before settlement and principal risk during settlement.

• Replacement cost risk: This risk arises from the failure of one of the parties to the transaction. While the non-defaulting party tries to replace the original transaction at current prices, he loses the profit that has accrued on the transaction between the date of the original transaction and the date of the replacement transaction.

• The seller/ buyer of the security loses this unrealized profit if the current price is below/ above the transaction price. Both parties encounter this risk as prices are uncertain.

• Principal risk: This risk arises if a party discharges his obligations but the counterparty defaults. The seller/buyer of the security suffers this risk when he delivers/ makes payment, but does not receive payment/delivery.

2. System Risk: This comprises of operational, legal, and systemic risks. The operational risk arises from possible operational failures such as errors, fraud, outages, etc. The legal risk arises if the laws or regulations do not support the enforcement of settlement obligations or are uncertain. Systemic risk arises when the failure of one of the parties to discharge his obligations leads to failure by other parties. The domino effect of successive failures can cause a failure of the settlement system.