OBJECTIVE QUESTIONS (1 mark) – Both Capital Market and Money Market
1. What is a financial market? Mention
its components. 2008
Ans:
It refers to a market which creates and exchanges financial assets and credit
instruments such as cheques, bills, bonds, deposits etc. It is divided into two
parts: Money market and capital market.
2. What are financial assets?
Ans:
It refers to the financial instruments or securities. For e.g. shares,
debentures, treasury bills, commercial paper etc.
3. What is floatation cost?
Ans:
The expenditure incurred in issuing the securities is called floatation cost.
4. What is a zero coupon bond?
Ans:
It is a financial instrument for which no interest is paid but is issued at a
discount redeemable at par.
5. State the components of capital
market?
Ans:
a) Primary market b) secondary market.
6. Name two buyers of Commercial
paper.
Ans:
a) Banks b) Insurance companies.
7. What is meant by “Near Money?”
Ans:
All very short term securities are called near money for e.g. marketable
securities.
8. What type of trade-off function is
performed by the money market?
Ans:
The money market establishes a balance between short term financial supply and
short term financial demand.
9. Name the instruments that are
traded in money market. 2013
Ans:
Call money, Commercial Papers, Certificates of deposits, Bills of exchange.
10. Name the instruments that are
traded in capital market.
Ans:
Stocks, Shares, Debentures, Bonds, GDR (Global Depository receipts)
11. Name the institutions operating in
the money market.
Ans:
Central Bank, Commercial banks, Non-bank financial institutions.
12. Name the institutions operating in
the capital market.
Ans:
IDBI, IFCI, ICICI, Stock exchanges.
13. In which year NSEI and BSE were
established? 2015
Ans:
NSEI – In 1991 and BSE – In 1875. But, NSEI was recognized in 1992.
14. In which year OTCEI was
established?
Ans:
1990
15. Write the full form of NSEI, BSE
and OTCEI. 2008
Ans:
NSEI – National stock exchange of India (Nifty)-Nov, 1992
BSE
– Bombay Stock Exchange (Sensex) – 1875 (Oldest Stock exchange of India)
OTCEI
– Over the Counter Exchange of India – October, 1990
16. State two promoters of NSEI.
Ans:
a) Industrial development bank of India (IDBI) b) Life insurance corporation of
India (LIC)
17. How many stock exchanges are there
in India?
Ans:
There are 24 stock exchanges in India.
18. Name two advisory committees set
up by SEBI.
Ans:
a) Primary market Advisory committee. b) Secondary market advisory committee.
19. What is price rigging?
Ans:
It refers to the manipulation of prices of the securities by agents/company for
their own profits.
20. On what lines was OTCEI started?
Ans:
It was started on the lines of NASDAQ (National Association of securities Dealers
Automated Quotation)
21. Name the system where there is
electronic book entry form of holding and transferring the securities.
Ans:
Dematerialisation.
22. What is ‘Demutualisation of
securities?’
Ans:
It separates the ownership and control of stock exchanges from trading rights.
23. Name the Benchmark index of BSE.
Ans:
SENSEX.
24. Stock exchange is called economic
barometer.
Ans:
True
25. State the segments of NSEI.
Ans:
a) Wholesale debt market b) Capital market segment
26. State one development function of
SEBI
Ans:
to carry out research work.
27. Capital Market is the market for
long term funds and money market is the market for short term funds? T/F
Ans:
Given statement is true. 2010,
2012, 2013
28. Give some examples of Primary
assets and secondary assets.
Ans:
Primary assets includes shares, debentures and bonds and secondary assets
includes mutual funds, bank deposit, insurance etc.
29. What are government
securities or gilt edged securities market?
Ans: In this market, market issue gild edged securities such as TBs,
Bonds and dated securities to raise money from public.
30. What is industrial
securities market?
Ans:
It refers to market for issue of securities for existing as well as new
companies.
Long answer type Questions
Q.1. What is Capital Market? What are
its components? Explain features and importance. 2014, 2016, 2020
Ans: Capital
Market is generally understood as the market for long-term funds. This market
supplies funds for financing the fixed capital requirement of trade and commerce
as well as the long-term requirements of the Government. The long-term funds
are made available through various instruments such as debentures, preference
shares and equity shares. The capital market can be local, regional, national,
or international. 99, 04, 08,09,11,14
The
capital market is classified into two categories (Components), namely,
(i)
Primary market or new issue market,
and
(ii)
Secondary market or stock exchange.
Features of Indian Capital Market 2015, 2018, 2022
a)
Dealing in Securities: It deals in
long-term marketable securities and non-marketable securities.
b)
Segments: It included both primary and
secondary market. Primary market is meant for issue of fresh shares and
secondary market facilitates buying and selling of second hand securities.
c)
Investors: It includes both individual
investors and institutional investors such as Mutual funds, banks, Insurance
companies etc. It also includes foreign institutional investors.
d)
Link between savers and investment
opportunities: Capital market is a crucial link between saving and investment
process. It facilitates flow of long term capital from those who have surplus
capital to those who need capital.
e)
Intermediaries: It acts through
intermediaries which includes bankers, brokers, underwriters etc.
f)
Government rules and regulations: The
capital market operates freely but under the guidance of government policies.
These market functions within the framework of government rules and
regulations.
Functions and Importance of Capital Market
a) Availability
of funds: Capital market helps to raise long term funds from both domestic and
as well as foreign institutional investors.
b) Mobilization
of savings: Capital market mobilizes the savings of individuals and
institutions to productive channels. It facilitates flow of long term capital
from those who have surplus capital to those who need capital.
c) Industrial
growth: it plays a significant role in the economic development of a country.
It facilitates increase in production and productivity in the economy and hence
enhances the economic welfare of the society.
d) Stability
in security prices: The Capital market tends to stabilize the values of stocks
and securities and reduce the fluctuations in the price to the minimum. The
process of stabilization is facilitated by providing capital to the borrowers
at a lower interest rate and reducing the speculative and unproductive
activities.
e) Liquidity:
It provides liquidity to investors in capital market. The securities issued
through the primary market are traded in the secondary market which provides
liquidity to the investors and also short-term as well as long-term yields on
their investments.
f) Promotion
of economic growth: The capital market not only reflects the general conditions
of the economy, but also smoothens and accelerates the process of economic
growth. Various institutions of the capital market allocate the resources
rationally in accordance with the development needs of the country.
g) Balance
between demand and supply: It bring about balance between demand and supply of
capital by creating a link between those who demand capital and those who
supply capital.
h) Attracting
foreign capital: Capital market helps in attracting foreign investments. The
Indian capital market provides the channel through which foreign institutional investors
and NRIs ca invest their funds in the securities of Indian companies.
Q.2. What is primary and secondary
market (Stock Exchange – 2015)? State four differences between primary market
and secondary Market.
Ans:
Primary market (2014,2016) which is also called new issue market represents a
market where new securities i.e. share, debentures and bonds that have never
been previously issued are offered. It is a market of fresh capital. The main
function of this market is to facilitate the transfer of funds from willing
investors to the entrepreneurs who need funds. but with the changing time, the
nature of primary market is also changing. There exist two types of primary
market:
a)
Market where firms issue securities
for the first time through Initial Public Offer (IPO).
b)
Market where firms which are already
trading in secondary market raise additional capital through Seasoned Equity
Offering (SEO).
Secondary market also called stock exchange represents a market
where existing securities i.e. shares and debentures are traded. Its main
function is to create a link between the buyers and sellers of securities so
that investments can change hands in the quickest and cheapest manner.
According to Securities Contract (Regulation) Act, 1956, the term
stock exchange has been defined as, “an association, organisation or body of
individuals, whether incorporated or not, established for the purpose of
assisting, regulating and controlling business in buying, selling and dealing
in securities.”
Thus, a stock market is a market where dealings in the listed
securities are made by the members of the exchange on their own behalf or on
behalf of others.
From the above explanation it is clear that there are some
differences between primary and secondary market which are given below:
|
Basis |
Primary Market |
Secondary Market |
|
1.
Meaning |
It
is the market where the securities are issued for the first time. It is also
referred as New issue market. |
It
is the market where the existing securities are traded. It is also called
stock Exchange. |
|
2.
Price determination |
The
prices of the securities are determined by the company. |
The
prices of the securities are determined by the forces of demand and supply of
the securities. |
|
3.
Buying and selling |
Here,
only buying of the securities take place. |
Here,
buying and selling of the securities, both take place. |
|
4.
Participants |
Securities are sold by the company directly
to the investors. |
Securities
are traded by the investors. Company is not involved in trading. |
|
5.
Purpose |
Purpose
of primary market is to provide capital for setting new business. |
The
main purpose of secondary market is to provide liquidity to the investors. |
|
6.
Capital formation |
Primary
market promotes capital formation directly. |
Capital
market promotes capital formation indirectly. |
Q.3. What is Primary Market? What are
the functions of Primary market?
Ans:
Primary Market (New Issue Market): A primary market refers to any market
where new shares of stock are sold. The primary market is the entry market for
companies and investors, where a company or institution that requires initial
or additional capital sells its shares or financial instrument to the
investors. For example, Initial Public Offering (IPO), public offer, rights
issue and bond issue are done on the primary market.
The
primary market is also unique that the initial buyer is the only person who can
exchange the securities for funds. When companies are willing to go for
publicly listed on the stock exchange and wants to collect funds from general
investors, they first sell their financial instrument in the primary market.
Primary market is the first place for trading financial instruments including
stocks and bonds.
Functions of Primary Market
The main function of a primary market can be divided into three service functions. They are:
origination, underwriting and distribution.
1. Origination: Origination refers to the work of investigation,
analysis and processing of new
project proposals. Origination begins before an issue is actually floated in the market. The function of origination is
done by merchant bankers who may be
commercial banks, all India financial institutions or private firms.
2. Underwriting: When a company issues shares to the public it is
not sure that the whole shares will
be subscribed by the public. Therefore, in order to ensure the full subscription of shares (or at least 90%) the
company may underwrite its shares or
debentures. The act of ensuring the sale of shares or debentures of a company even before offering to the public is
called underwriting. It is a
contract between a company and an underwriter (individual or firm of individuals) by which he agrees to
undertake that part of shares or
debentures which has not been subscribed by the public. The firms or persons who are engaged in underwriting are called
underwriters.
3. Distribution: This is the function of sale of securities to
ultimate investors. This service is
performed by brokers and agents. They maintain a direct and regular contact with the ultimate investors.
Q.4. List out various intermediaries
of New Issue Market?
Ans: The Primary Market is primarily associated with the issuance of
new securities, such as stocks and bonds, by companies and governments to raise
capital. In this market, financial intermediaries play various roles, but their
functions are not typically described in terms of Net Interest Margin (NIM).
Instead, they facilitate the issuance and distribution of securities to
investors. Key intermediaries in the Primary Market include:
a) Investment Banks:
Investment banks assist companies and governments in the process of issuing new
securities. They help in underwriting the offerings, pricing the securities,
and marketing them to potential investors.
b) Underwriters:
Underwriters commit to purchasing the securities from the issuer at a specific
price and then sell them to investors. They assume the risk associated with
selling the securities to the public.
c) Brokerage Firms:
Brokerage firms facilitate the buying and selling of securities in the Primary
Market. They often act as intermediaries between investors and the underwriters
or issuers.
d) Regulatory Authorities: Regulatory bodies, such as the Securities and Exchange Board of
India (SEBI) in India, oversee and regulate the Primary Market to ensure
transparency, fairness, and investor protection.
e) Issuers: Companies,
government entities, and other organizations seeking to raise capital through
the issuance of securities are also participants in the Primary Market.
f) Individual and Institutional Investors: Investors, both individual and institutional (such as mutual funds,
pension funds, and insurance companies), participate in the Primary Market by
purchasing newly issued securities.
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UNIT 3:
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*******************************
Q.5. Mention various methods of issue
or raising capital in the New issue market?
Ans:
Mode of raising capital in the Primary market
1.
Public issue/Prospectus: Securities
are issued to the general public. This is the most popular method of raising
long term fund. In this method securities are offered to the public by issuing prospectus.
2.
Right issue: The equity shares of a
company are issued to the existing equity shareholders in the form of right
issue. In this issue additional securities are offered to the existing
shareholders.
3.
Private placement: Under private
placement the shares of a company are sold among the selected group of persons.
4.
Offer for
Sale Method: Under this method, instead of offering shares
directly to the public by the company itself, it offers through the
intermediary such as issue houses / merchant banks / investment banks or firms
of stock brokers.
5.
Other
Methods of Issuing Securities: Apart from the above methods, there
are some other methods of issuing securities. They are:
a.
Tender
method: Under tender method, the issue price is not predetermined. The company
announces the public issue without indicating the issue price. It invites bids
from various interested parties. The parties participating in the tender submit
their maximum offers indicating the maximum price they are willing to pay. They
should also specify the number of shares they are interested to buy. The
company, after receiving various offers, may decide about the price in such a
manner that the entire issue is fairly subscribed or sold to the parties
participating in the tender.
b.
Issue of bonus
shares: Where the accumulated reserves and surplus of profits of a company
are converted into paid up capital, it is called bonus issue. It simply refers
to capitalization of existing reserves and surpluses of a company.
c.
Offer to the
employees: Now a day’s companies issue shares on a
preferential basis to their employees (including whole time directors). This
attracts, retains and motivates the employees by creating a sense of belonging
and loyalty. Generally, shares are issued at a discount. A company can issue
shares to their employees under the following two schemes: (a) Employee stock
option scheme and (b) employee stock purchase scheme.
d.
Offer to the
creditors: At the time of reorganization of capital,
creditors may be issued shares in full settlement of their loans.
e.
Offer to the
customers: Public utility undertakings offer shares to
their customers.
Q.6.
What are the merits and demerits of New Issue Market (NIM)?
Ans: Available in our mobile application
Q.7. What is stock exchange? Mention
its features. “Stock exchange is the barometer of the economy” In the light of
the statement, discuss the functions of the stock exchange.
Ans:
STOCK EXCHANGE (2013): A stock
exchange is highly organised financial market where the second hand securities
can be bought and sold. Its main functions are to create a link between the
buyers and sellers of securities so that investments can change hands in the
quickest, cheapest and fairest manner. Under the Securities Contract
(Regulation) Act, 1956, the term stock exchange has been defined as “as association,
organisation or body of individuals, whether incorporated or not, established
for the purpose of assisting, regulating and controlling business in buying,
selling and dealing in securities”. 2013,
FEATURES
OF STOCK EXCHANGE
The important features of stock exchange are as follows –
a) Stock
exchange is a market where dealings take place in shares, debentures and bonds
issued by the company’s corporations, government, etc.
b) Only
those securities could be traded that are included in the official list of stock
exchange.
c) It
also deals in government securities.
d) Stock
exchange is organisation in the form of an association or a company or a body
of individuals.
e) It
is a common meeting place of buyers and sellers of second hand securities.
f)
In stock exchanges, brokers serve as a
link between the buyers and sellers.
g) Stock
exchanges frame their rules and regulations.
h) The
areas of operations of stock exchange or geographical jurisdiction is well
defined.
i)
In India, stock exchanges operate as
per guidelines issued by the Securities and Exchange Board of India.
Functions
of stock exchange 08,
09, 10, 12, 14, 2016, 2018, 2019, 2022
As the barometer measures the atmospheric pressure, the stock
exchange measures the growth of the economy. It performs the following vital
functions:
1. Ready
market and liquidity: Stock exchange provides a ready and continuous market
where investors can convert their money into securities and securities into
money easily and quickly. It provides a convenient meeting place for buyers and
sellers of securities.
2. Evaluation
of securities: Stock exchange helps in determining the prices of various
securities that reflect their real worth. The forces of demand and supply act
freely in the stock exchange and help in the valuation of securities.
3. Mobilisation
of savings: Stock exchange helps in mobilising surplus funds of individuals and
institutions for investment in securities. In the absence of facilities for
quick and profitable disposal of securities, such funds may remain idle.
4. Capital
formation: Stock exchange not only mobilises the existing savings but also
induces the public to save money. It provides avenue for investment in various
securities which yield higher returns. It helps in allocation of available
funds into the most productive channels.
5. Regulation
of corporate sector: Stock exchanges frame their rules and regulations. Every
company which wants its securities to be dealt in at the stock exchange has to
follow the rules framed by the stock exchange in this regard.
6. Economic
barometer: Stock exchange is very sensitive barometer of business conditions in
the country. Booms, depressions and other important events affect prices of
securities. Price trends on the stock exchange reflect the economic climate in
the country. One can easily analyse the cause of change in the business climate
by the ups and downs on the stock exchange.
7. Encourages
Industrialization: The stock exchange provides capital to industry and
commerce. They provide finance to the Govt.
8. Helps
government in the Policy Formulation: All the government policies have their
clear reflection on the national science through stock exchange whether they
are economic policies or monetary or fiscal.
Q. 8.
Mention various types of operators in stock exchange.
Ans: Types
of operators in Stock Exchange
1. Brokers: A broker is a member of the stock
exchange who buys and sells securities on behalf of investors. He charges
brokerage or commission for his services.
2. Jobber: A jobber also known as Tarawaniwala
is a member of the stock exchange who is specialised in one type of security
and buys and sells securities on his own behalf.
3. Bulls: A bull is a speculator who buys
securities expecting higher prices in future.
4. Bears: A bear is a speculator who sells
securities expecting fall in prices in near future.
5. Stag: A stag is a speculator who applies
for new securities in expectation that prices will rise by the time of
allotment and he can sell them at premium.
Q.9. What
is listing of securities? What are its objectives and benefits?
Ans: Listing
means the admission of a company’s securities to trading on a stock exchange.
Listing is not a compulsory act under the Companies Act 2013. It only important
when a Public Limited
Company wants to issue shares or debentures to public. When
securities are listed on a stock exchange, the company will have to comply with
the exchange’s requirements.
Listing
of securities on a stock exchange is a significant step for companies and other
entities looking to raise capital and provide investors with the opportunity to
trade their securities. The main Objectives
of Listing Securities are given below:
1. Access to Capital:
One of the primary objectives of listing securities is to access capital from
the investing public. By issuing shares or bonds, companies can raise funds for
business expansion, research and development, debt repayment, and other
corporate purposes.
2. Enhanced Liquidity:
Listing provides shareholders with a platform to sell their securities,
increasing liquidity. Investors can buy and sell shares more easily, which can
attract a broader investor base.
3. Market Valuation:
Listing on a stock exchange provides a transparent market valuation for the
company's securities. The market price reflects investor sentiment and the
perceived value of the company.
4. Credibility and Visibility:
Listing on a reputable stock exchange enhances a company's credibility and
visibility in the financial markets. It demonstrates that the company has met
regulatory and disclosure standards.
5. Mergers and Acquisitions:
Listed companies may have more opportunities for mergers, acquisitions, and
strategic partnerships, as their shares are more readily tradable and can be
used as currency in deals.
The
benefits of listing securities on a stock market include the following:
1. Higher
liquidity: When securities are listed on a stock market, investors can buy
or sell them more easily. The increased trading activity improves the assets’
liquidity, increasing their allure to investors.
2. Heightened visibility: A company’s exposure and visibility
to potential investors are increased by listing on a stock market. This heightened
awareness might draw in new investors and present chances for the business to
acquire more money.
3. Enhanced legitimacy: A company and its securities gain
legitimacy and credibility by being listed on a stock exchange. Investor
confidence is bolstered by the stringent listing standards and regulations
connected with exchanges, which add to the company’s overall credibility.
4. Access to capital: The opportunity to access new streams
of finance is one of the significant advantages of listing securities. Broader
pools of possible investors, including institutional investors, who are more
inclined to invest in listed shares, become accessible when a company is listed
on a stock market.
5. Improved Market Awareness and Brand Reputation: Listing on
a stock exchange can improve market acceptance and brand awareness for a
company. Because a listing is public, there is potential for more media
interest and analyst focus. This increased visibility might bring in new
clients, collaborators, and business prospects, which will help the
organization expand and prosper as a whole.
Q.10. What are the formalities and
conditions for listing of securities?
Ans: Formalities for Listing Securities:
1. Legal Compliance:
Companies must adhere to the legal and regulatory framework of the country in
which they seek to list their securities. Compliance with securities laws and
regulations is essential.
2. Due Diligence:
The company must undergo a thorough due diligence process to ensure accurate
financial reporting, corporate governance, and compliance with listing
requirements.
3. Appointment of Advisors:
Companies often engage financial advisors, underwriters, and legal counsel to
assist with the listing process. These professionals help navigate the legal
and financial aspects of listing.
4. Prospectus: A
prospectus, containing detailed information about the company, its financials,
management, and the offering of securities, is prepared and submitted to
regulatory authorities and prospective investors.
5. Disclosure:
Companies are required to provide ongoing disclosures of financial performance,
corporate events, and other material information to the stock exchange and
investors to ensure transparency.
Conditions for Listing Securities:
1. For initial public offers (IPOs) and follow-on public
offerings (FPOS), the minimum paid-up capital for the firm must be INR 10 crore
and INR 3 crore, respectively.
2. The offering must be at least INR 10 crore in size.
3. A minimum market capitalization of INR 25 crore is required for
the company.
4. The applicant, promoters, and/or group firms cannot break the
listing agreement without permission.
5. The issuer must abide by any laws, rules, and directives that
may be relevant, such as those outlined in the Securities Contracts
(Regulations) Act of 1956 1and
the Securities Contracts (Regulation) Rules of 1957.
6. Before submitting their prospectus or Exchange (BSE) before
using the BSE name offer for sale paperwork to the Registrar of Companies,
companies must first receive permission from the Bombay Stock in those
documents. Before registering with the Registrar of Companies, a letter of
application must be sent to each stock market where the company seeks to be
listed.
7. The company must complete the allotment of securities
in accordance with the Listing Agreement within 30 days of closing the public
subscription list.
8. Each financial year’s 30th April is the deadline for all
publicly traded companies to pay the BSE’s annual listing fee.
Q.11. Who
is a stock broker? What are the qualifications essentials for a stock broker?
Ans: Meaning of Broker: An individual cannot buy or sell securities
directly at stock exchange. He can do so only through a broker. So he has to
select a broker through whom the purchase or sale is to be made. Brokers are
commission agents who act as an intermediary between buyers and sellers of
securities in the primary and secondary markets. They are brokerage from both
buyer and seller for their services.
Qualifications
to Become a Stockbroker in India:
1. To become a stockbroker in India, individuals typically
need to meet certain educational and regulatory requirements. Here are the key
qualifications:
2. Educational Background: A bachelor's degree in
finance, economics, business, or a related field is often a prerequisite. Many
successful stockbrokers also pursue postgraduate degrees or professional
certifications related to finance and investment.
3. Registration: Stockbrokers must be registered with
the Securities and Exchange Board of India (SEBI), which is the regulatory
authority overseeing the securities market in India. SEBI sets eligibility
criteria for stockbrokers, including minimum educational qualifications and
experience.
4. Certifications: A stockbroker must pass the
Financial Industry Regulatory Authority's General Securities Representative
Exam (FINRA).
Stockbrokers are also required to pass relevant
securities market certification exams conducted by SEBI-approved organizations,
such as the National Institute of Securities Markets (NISM). The NISM offers
various certification programs, including the NISM Series-XA: Investment
Advisor (Level 1) and NISM Series-XB: Investment Advisor (Level 2).
5. Financial Literacy and Regulatory Knowledge:
Stockbrokers must have a deep understanding of financial markets, securities
laws, and regulatory requirements. Staying updated on changes in market
regulations is essential.
6. Experience: Many stockbrokers start their careers as
trainees or associates in brokerage firms to gain practical experience and
industry exposure. The specific experience requirements can vary depending on
the brokerage firm and SEBI regulations.
7. Membership in Stock Exchanges: Stockbrokers often
become members of recognized stock exchanges in India, such as the National
Stock Exchange (NSE) or the Bombay Stock Exchange (BSE), which allows them to
execute trades on these exchanges.
Q.12. What
is sub-broker? What are various kinds of brokers?
Ans: Meaning of Sub-broker: A sub-broker is an agent of a broker who
provides services to clients on behalf of main brokers. They act as a middleman
between the main broker and the clients. Due to large number of customers, it
is not possible for a broker provide services across the country. They act
through a chain of sub-brokers to provide services to their clients across the
country. A stockbroker entrusts the sub-broker with multiple responsibilities,
like sourcing clients, providing services and client management.
Brokers are of three types:
a) Full-service brokers: Full-service brokers are those
who through their wide range of network, provides complete services to their
clients including advisory assistance. Charges of full-service brokers are
generally higher as compared to other brokers.
b) Discount brokers: Discount brokers are those who
charge comparatively lower brokerage as compared to full-service brokers. They
do not provide advisory assistance to their clients. They provide all services
to their client mainly through mobile application. Zerodha, Angel Broking,
Upstox are some of the most popular and renowned discount brokers in India.
c) Brokers charging flat brokerage: In present
competitive environment, these brokers are gaining popularity. These brokers
charge a flat commission on every transaction.
Q.13.
Explain the procedure for registration of a stock broker.
Ans: To become a registered stockbroker in India, individuals must
follow these steps:
1. Complete the necessary educational qualifications
and certifications.
2. Gain practical experience in the financial industry,
especially in areas related to securities trading and investment advisory
services.
3. Apply for registration with SEBI as a stockbroker.
4. Submit the required documentation, including
educational certificates, certifications, proof of experience, and other
relevant documents.
5. Pay the registration fees and fulfill any additional
requirements specified by SEBI.
5. Once approved, stockbrokers receive a unique
registration number and can operate as authorized intermediaries in the Indian
securities market.
Q.14.
Explain in details various functions of a stock broker.
Ans: Role and duties of stock brokers:
The duties of a broker can be divided into three
categories:
A) General Duties:
1. Integrity: A stock broker maintains high standards
of integrity in the conduct of all his business activities.
2. Exercise of due care and diligence: A stock broker
shall act with due care and diligence in the conduct of his business.
3. Manipulation: A stock broker shall not indulge in
manipulations of securities or spreading rumours in stock market.
4. Malpractices: A stock broker shall not create false
market or do not indulge in any act which is detrimental to the interest of the
investors.
5. Compliance with statutory requirements: A stock
broker along with its sub-brokers shall abide by the all the provisions of the
Act and the rules, regulations issued by the Government and SEBI.
B) Duties to the Investors:
1. Execution of orders: A stock-broker shall faithfully
execute the orders of buying and selling of securities at the best available
market price and not to refuse to deal with a small investor.
2. Issue of contract note: A stock-broker shall issue
contract note of all the transactions made by client immediately or on the date
of the transactions.
3. Not to Breach the trust: A stock-broker must not
share the details of its client with third party.
4. Avoid doing Business with defaulting client: A
stock-broker shall not deal or transact business with a client who already
defaulted in carrying out his commitments with another stock-broker.
5. Investment Advice: A stock broker shall not make a
recommendation to any client who might be expected to rely thereon to acquire
or dispose of any securities unless he has reasonable grounds for believing
that the recommendation is suitable for such a client.
C) Duties towards its sub-brokers and other
stock-brokers:
1. Conduct of dealings: A stock-broker shall co-operate
with the other stock-brokers or sub-brokers contracting party in comparing
unmatched transactions.
2. Protection of client interests: A stock-broker shall
extend fullest co-operation to other stock-brokers or sub-brokers in protecting
the interest of his clients regarding their rights to dividends, bonus etc.
3. Advertisement and publicity: A stock-broker shall
not advertise his business publicly unless permitted by the stock exchange.
4. Inducement of clients: A stock-broker shall not
resort to unfair means of inducing clients from other stock-brokers.
5. False or misleading returns: A stock-broker shall
not neglect or fail to refuse to submit the required return and not make any
false or misleading statement on any returns required to be submitted to the
board and the stock exchange.
Q.15. What
are various methods of trading of stocks?
Ans: Common
methods for trading of stocks are given below:
1. Day Trading: Day trading involves buying and selling stocks
within the same trading day. Day traders aim to profit from short-term price
movements and typically do not hold positions overnight. They rely on technical
analysis, charts, and intraday price patterns to make quick trading decisions.
2. Swing Trading: Swing trading aims to capture short
to medium-term price swings in stocks. Swing traders hold positions for several
days to weeks, taking advantage of price movements within that time frame.
3. Position Trading: Position trading takes a long-term
perspective on stock trading. Investors who practice position trading may hold
positions for months or even years. Fundamental analysis is typically employed
to assess the long-term growth prospects of the stocks.
4. Value Investing: Value investors look for stocks
that they believe are undervalued by the market. They focus on a company's
fundamentals, such as earnings, dividends, and financial health, to identify
opportunities for long-term investment.
5. Growth Investing: Growth investors seek stocks of
companies with strong potential for future growth. They are willing to pay a
premium for stocks that show promising revenue and earnings growth.
6. Momentum Trading: Momentum traders focus on stocks
that are currently experiencing strong price trends. They buy stocks that are
rising and sell stocks that are falling, aiming to profit from the continuation
of existing trends.
7. Options Trading: Options trading involves trading
contracts that give the holder the right to buy (call options) or sell (put
options) a stock at a predetermined price within a specified time frame.
8. Futures Trading: Futures trading involves contracts
to buy or sell an asset, including stock index futures. Traders use futures
contracts for speculation or to hedge against future price movements.
Q.16. What
is online trading? What are its advantages and limitations?
Ans: Online trading refers to the process of buying and selling
financial instruments, such as stocks, bonds, commodities, currencies, and
derivatives, through internet-based trading platforms provided by brokerage
firms or financial institutions. It allows individual investors, traders, and
institutions to execute trades, monitor market data, and manage their
investment portfolios electronically, without the need for physical presence or
manual intervention.
Advantages of Online
Trading:
1. Convenience: Online trading can be done from anywhere with an internet
connection. Investors can trade at their convenience, even outside regular
market hours.
2. Cost
Efficiency: Online trading often comes with lower transaction costs and
reduced brokerage fees compared to traditional methods. Many online brokers
offer competitive pricing.
3. Real-Time
Data: Online trading platforms provide real-time access to market data,
including stock quotes, charts, news, and research tools, enabling informed
decision-making.
4. Accessibility:
It opens up financial markets to a broader audience, allowing both retail and
institutional investors to participate in trading activities.
5. Speed:
Trades can be executed swiftly, reducing the chances of missing out on market
opportunities or reacting to price changes.
Limitations of Online
Trading:
1. Technical Issues: Online trading platforms are reliant on technology, which may be
vulnerable to glitches, outages, or connectivity problems. These issues can
disrupt trading activities.
2. Overtrading:
Easy access to online trading can lead to impulsive and excessive trading,
which can result in higher costs and potential losses.
3. Lack of
Personal Guidance: Online trading lacks the personalized advice and
guidance offered by traditional brokers or financial advisors. Investors must
rely on their own research and judgment.
4. Market
Volatility: Online traders may be more susceptible to emotional
reactions to market volatility, potentially leading to hasty decisions.
5. Security
Concerns: Cybersecurity threats and fraud are risks associated with
online trading. Investors need to take precautions to safeguard their accounts
and personal information.
Q.17. What
are stock indices? Explain its need.
Ans: 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.
Some of the popular indices are:
1. Nifty
2. Sensex
3. Bank nifty etc.
Importance of Stock Indices:
1. Measuring Performance: Stock markets have thousands
of stocks. Indices help us measure how the entire market or specific groups of
stocks are performing.
2. Quick Understanding: Indices give us a quick idea of
whether the market is going up, down, or staying steady.
3. Benchmarking: Investors and fund managers use
indices as benchmarks to compare how their investments are doing compared to
the overall market.
4. Diversification: They help investors spread their
investments across different stocks and sectors, reducing risk.
5. Tracking Trends: Indices help us track trends in the
market and make informed investment decisions.
Q. 18. What is Sensex and
Nifty? Mention their features.
Ans: Meaning of Sensex: SENSEX is a stock market index that
represents the performance of the Bombay Stock Exchange (BSE), one of India's
major stock exchanges. It's often called the "SENSEX 30" because it
includes 30 large and influential companies.
Features of Sensex:
1. Top 30 Companies: SENSEX consists of 30 of the most
prominent and financially strong companies listed on the BSE. These companies
are like the leaders of the stock market.
2. Diverse Sectors: It covers various sectors, such as
IT, banking, manufacturing, and more, offering a broad view of the Indian
economy.
3. Market Indicator: SENSEX serves as a barometer for
the Indian stock market. When SENSEX goes up, it indicates that the stock
market is generally doing well, and when it goes down, it suggests the market
is facing challenges.
Meaning of Nifty: NIFTY is another stock market index,
but it's from the National Stock Exchange of India (NSE). It's called
"Nifty 50" because it includes 50 well-established companies.
Features of Nifty:
1. Top 50 Companies: NIFTY comprises 50 leading
companies listed on the NSE. These companies are chosen for their importance in
the stock market.
2. Diverse Representation: NIFTY 50 represents various
industries and sectors, making it a diverse index.
3. Indicator of Market Health: Just like SENSEX, NIFTY
acts as a gauge of the Indian stock market's health. If NIFTY goes up, it
indicates the stock market is performing well, and if it goes down, it suggests
challenges in the market.
Q.19. Write a brief note
on various steps in trading and settlement procedure in Indian stock market.
Ans: Steps in the Trading and Settlement Procedures in India:
1. Trading Process:
- Order Placement: Investors place buy or sell orders through
brokers on stock exchanges. Orders include details like the stock name,
quantity, and price.
- Order Matching: Stock exchanges match buy and sell orders based on
price and time priority. This process determines the execution of trades.
- Trade Confirmation: Once orders are matched, a trade confirmation
is sent to both the buyer and the seller, indicating the details of the transaction.
- Trade Execution: The actual buying and selling of securities occur
at the prevailing market price when the orders are matched.
2. Settlement Process:
- T+1 Settlement Cycle: In India, the settlement cycle is typically
T+1, meaning transactions settle two business days after the trade date.
- Clearing Corporation: The clearing corporation acts as an
intermediary, guaranteeing the settlement of trades. It ensures that both the
buyer and the seller fulfill their obligations.
- Trade Confirmation by Clearing House: The clearing house issues a
trade confirmation to both parties, specifying the settlement date and the
securities and funds to be exchanged.
- Payment of Funds: On the settlement date, the buyer transfers
funds to the clearing house, and the seller delivers the securities. This
process ensures the completion of the financial transaction.
- Delivery of Securities: Securities are delivered to the buyer's
demat account through the depository system, ensuring a secure and efficient
transfer.
- Payment to Sellers: Once the clearing house confirms the
successful completion of the settlement, funds are transferred from the buyer
to the seller.
- Settlement Completion: The settlement process is considered
complete when both the funds and securities have been successfully transferred,
and the trade is settled.
3. Dematerialization and Rematerialization:
- Dematerialization: Investors can convert physical share
certificates into electronic or dematerialized form by opening a demat account
with a depository participant.
- Rematerialization: Conversely, investors can convert electronic holdings back into physical certificates through a process known as Rematerialization.
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