Introduction to Stock Market Solved Question Paper 2024

Introduction to Stock Market Solved Question Paper December 2024

Dibrugarh University BCOM 3^rd SEM NEP Syllabus

COMMERCE (Minor)

Paper: MINFIN3

Time: 2 Hours

Full Marks: 60

(The figures in the margin indicate full marks for the questions)

Q.1. Fill in the blanks: (1×4 = 4 marks)

a) The Secondary Market is the market for sale or purchase of already issued securities.

b) In mutual fund, an open-ended scheme allows the investor to make entry and exit at any point of time.

c) The money market is a place where the demand for and the supply of short-term funds meet.

d) The full form of NASDAQ is National Association of Securities Dealers Automated Quotations.

Q.2. Write short notes on (any four): (4×4 = 16 marks)

a) Clearing House

Ans: A clearing house acts as an intermediary between buyers and sellers in financial markets, ensuring the smooth and efficient settlement of transactions. It facilitates the clearing and settlement of trades, manages counterparty risk, and enhances market liquidity.

By acting as a central counterparty (CCP), a clearing house guarantees the performance of trades, thereby reducing the risk of default. In many markets, clearing houses also manage margin requirements and conduct daily mark-to-market settlements. They play a crucial role in maintaining the stability and integrity of financial markets, especially in derivatives and futures trading.

Role of Clearing house:

1. The clearing house acts as a middleman between buyers and sellers, taking on the responsibility for ensuring that both parties fulfill their contractual obligations.

2. Risk Management: By becoming the counterparty to both sides of a trade, the clearing house mitigates the risk of default. If one party fails to meet their obligations, the clearing house steps in to complete the transaction.

b) Money Market

Ans: Money market is a place where money and short term financial assets which are close substitutes of money are traded. It mainly deals in cash or near money or liquid assets of short-term nature. It also deals in treasury bills (TBs), Commercial bills, Commercial paper (CP), ADRs, GDRs, Call and Short money market etc.

According to the RBI, "The money market is the centre for dealing mainly of short character, in monetary assets; it meets the short term requirements of borrowers and provides liquidity or cash to the lenders. It is a place where short term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the government."

From the above explanation, we can say that money market is a market for short term funds meant for use for a period of one year or less. The major participants of money market consist of the government, commercial banks, Life insurance companies, Mutual funds, Non-banking finance companies, stock exchange brokers etc.

c) Stock Market

Ans: Secondary market or stock exchange: 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.

Features of Secondary Market

1. It is a market where the existing securities are traded. It is also called stock Exchange.

2. In secondary market, both buying and selling of securities take place. Unlike primary market, Securities of companies are traded between investors. There is no connection between investors and the company.

3. In secondary market, the prices of the securities are determined by the forces of demand and supply of the securities.

4. High rate of growth in securities encourages new investors to invest in securities market.

d) Fundamental Analysis

Ans: Fundamental analysis is method of finding out the future price of a stock which an investor wishes to buy. Fundamental analysis is used to determine the intrinsic value of the share of a company to find out whether it is overpriced or underpriced by examining the underlying forces that affect the well-being of the economy, Industry groups and companies.

Fundamental analysis is simply an examination of future earnings potential of a company, by looking into various factors that impact the performance of the company. The prime objective of a fundamental analysis is to value the stock and accordingly buy and sell the stocks on the basis of its valuation in the market. The fundamental analysis consists of economic, industry and company analysis. This approach is sometimes referred to as a top-down method of analysis.

e) Demat Account

Ans: Dematerialisation is a process whereby an investor’s holding of investments in physical form (paper), is converted into a digital record. Benefit of holding investments in demat form is that investors’ purchase and sale of investments get automatically added or subtracted from their investment demat account, without having to execute cumbersome paperwork. Now Settlement of all the transactions in the stock exchange needs to be compulsorily done in demat form.

The demat facility is typically initiated by the mutual fund, which would tie up with a Depository (like National Securities Depository Ltd or Central Depository Securities Ltd). On the basis of this tieup, investors can go to a Depository Participant and demat their investment holding i.e. convert their physical securities or units into demat units. In order to avail of this facility, the Depository Participant will insist on the investor opening a demat account. Usual KYC documentation such as Aadhaar card, pan card and bank account will be required.

Q.3. a) Explain the role of SEBI in regulating the financial market of India. (10 marks)

Ans: Securities Exchange Board of India (SEBI) was set up in 1988 to regulate the functions of stock market but it was granted legal status in the year 1992. SEBI is a body corporate having a separate legal existence and perpetual succession.

Role and Functions of SEBI:

SEBI is considered to be watch dog of securities market. It plays a significant role in the regulations and development of stock market. Functions of SEBI are mainly divided into three (3) categories:

1. Protective Functions of SEBI: Protective functions are those which are performed by SEBI to protect the interest of investor and provide safety of investment. It plays a significant role in maintaining faith of investors in stock market. Protective functions of SEBI include:

(i) Prohibition and control Price Rigging: Price rigging refers to an act of manipulation of prices of securities by potential traders with the object of inflating or depressing the market price of securities. This is done to defraud and cheat the small investors. SEBI prohibits such practices and can take actions against those who are found involve in such activities.

(ii) Prohibition of Insider trading: Insider are those person which have connection with the company such as directors, promoters etc. These insiders have sensitive information which is not available to people at large. Such information can affect the price of securities and insiders can take the advantage of such information and if they use this information to make profit in stock market, then it is known as insider trading. SEBI keeps a close eye when insiders are buying securities of the company and takes strict action if anyone in found involved in insider trading.

(iii) Prohibitions of fraudulent and Unfair Trade Practices: Any statement by the company which induces their investors to buy or sale their shares is considered to a fraudulent and unfair trade practices. SEBI does not allow the companies to make misleading statements and can take strict action if companies are found involve in these acts.

(iv) Investor education: SEBI undertakes steps to educate the investors about the securities market so that they are able to evaluate the securities of various companies before investment and select the most profitable securities.

(v) SEBI promotes fair practices and code of conduct in security market by taking following steps:

(a) SEBI has issued guidelines to protect the interest of debenture-holders wherein companies cannot change terms in midterm.

(b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine and imprisonment.

(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to market prices.

2. Developmental Functions: Development functions are those which are performed by the SEBI to promote and develop activities in stock exchange and increase the trading and investment in stock exchange. SEBI perform the following development functions:

(i) SEBI conducts training of intermediaries of the securities market. SEBI also approved various courses for investors and intermediaries.

(ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable approach in following way:

(a) Now internet based trading through registered stock brokers is permitted by SEBI. Now you can trade at the convenience of your home by simply downloading and registering mobile application of any registered broker.

(b) Underwriting is now made optional by SEBI which reduces the cost of issue of securities.

(c) SEBI now permitted the initial public offer through stock exchange. Previously companies were issuing IPO only in primary market.

3. Regulatory Functions: These functions are performed by SEBI to regulate the business in stock exchange. To regulate the activities of stock exchange following functions are performed:

(i) SEBI has framed rules and regulations and a code of conduct to which every intermediary of stock market such as merchant bankers, brokers, underwriters, etc must be adhered to.

(ii) All intermediaries of the stock market are brought under the regulatory purview of SEBI and more restrictions are imposed on private placement of shares.

(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents, trustees, merchant bankers and all those who are associated with stock exchange in any manner.

(iv) Mutual funds institutions are also registered and regulated by SEBI.

(v) Takeover of the companies are also regulated by SEBI.

(vi) Inquiries and audit of stock exchanges are conducted by SEBI at regular intervals.

Or

b) What is stock exchange? Discuss the organization and management of stock exchanges in India. (2+8 = 10 marks)

Ans: 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.

Organization and Management of Stock Exchanges in India

The organization and management of stock exchanges have evolved over time, moving from traditional associations to modern, structured entities, which is crucial for maintaining market confidence.

1. Organization Structure: Historically, stock exchanges were organized in different legal forms:

a) Voluntary Non-Profit Associations: Popular Indian stock exchange like the Bombay Stock Exchange (BSE), Ahmedabad, and M.P. (Indore) Stock Exchanges, were initially organized as voluntary, non-profit associations of persons. But most of these are now converted into public limited companies.

b) Public Limited Companies: Some state level stock exchange such as the Calcutta, Delhi, U.P. (Kanpur), and Ludhiana Stock Exchanges, were organized as public limited companies.

c) Companies Limited by Guarantee: Quite a few others were structured as companies limited by guarantee.

2. Membership: Membership initially comprised individuals and partnership firms. Over time, companies were also permitted to become members. Currently, a significant number of financial institutions also hold memberships in Indian stock exchanges.

3. Management: The internal governance of every stock exchange is entrusted to a Governing Board (or Governing Body).

Composition: The Board is headed by an Executive Director/President and comprises both brokers (who are trading members) and non-brokers. Crucially, the Governing Bodies also include Government Nominees to ensure public interest is safeguarded.

Executive Director/President's Role: This individual is the chief executive, responsible for ensuring the strict compliance of all members of the exchange with rules, bye-laws, margin regulations, and trading restrictions.

4. Powers of the Governing Board: Subject to the previous approval of SEBI, the Governing Board possesses wide-ranging powers to manage and regulate the exchange's operations:

a) Rule Making: It has the ultimate power to make, amend, suspend, and enforce rules, bye-laws, and regulations.

b) Membership Control: It can admit, punish, censure, and expel any member, partner, remisier (authorized agent), authorized clerk, and employee.

c) Dispute Resolution: It has the authority to adjudicate disputes that arise among members or related parties.

d) Supervision: The Board is responsible for supervising the entire functioning of the stock exchange, ensuring smooth and ethical operations.

Q.4. a) Distinguish between new issue market and secondary market. (10 marks)

Ans: Primary Market (New Issue Market)

Primary market which is also called new issue market represents a market where new securities i.e. shares, debentures and bonds that have never been previously issued are offered. It is a market of fresh capital. 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.

Secondary market or stock exchange

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.

Difference between Primary Market and Secondary Market

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.	Secondary market promotes capital formation indirectly.
7. Particular place	Primary market has no particular place but the activity of bringing in new issues is called the primary market.	Secondary market has a particular place which is called stock exchange.

Or

b) Explain in brief about NSE and trading system on NSE. (10 marks)

Ans: Available in Video

Q.5. a) What are the advantages and disadvantages of investing in mutual funds? (10 marks)

Ans: Mutual Funds Advantages

A mutual fund is a special type of institution which acts as an investment intermediary and channelizes the savings of large number of people towards the corporate securities in such a way that investors get steady returns and capital appreciation at low risk. Mutual funds are gaining popularity now days due to the following advantages:

1. Professional Management: A small investor cannot be an expert in portfolio management so there is a chance of loss for small investors. Mutual funds offer investors the opportunity to earn an income or build their wealth through professional management of their investible funds. There are several aspects to such professional management viz. investing in line with the investment objective, investing based on adequate research, and ensuring that prudent investment processes are followed.

2. Diversification: It is not possible for small investors to invest in variety of sectors. They mainly invest in few selected securities and rely on them for good return. An investor in a mutual fund gets the advantage of being invested in the entire fund’s portfolio which is invested in a diversified sector. Thus, even a small investment of Rs 5,000 in a mutual fund scheme can give investors a diversified investment portfolio.

3. Economies of large Scale investment: The pooling of large sums of money from so many investors make it possible for the mutual fund to engage professional managers to manage the investment. Individual investors with small amounts to invest cannot, by themselves, afford to engage such professional management.

4. Liquidity: The most peculiar advantage of a mutual fund is that investments made in its schemes can be converted into cash promptly with incurring any heavy expenditure. As per the regulations of SEBI, is becomes necessary for every mutual funds institution are to ensure liquidity for its investors.

5. Tax Benefits: Mutual funds are not liable to pay tax on the income they earn. If the same income were to be earned by the investor directly, then tax may have to be paid in the same financial year. Specific schemes of mutual funds (Equity Linked Savings Schemes) give investors the benefit of deduction of the amount invested, from their income that is liable to tax. This reduces their taxable income, and therefore the tax liability.

Mutual Funds Disadvantages

In spite of various advantages, mutual funds suffer from various disadvantages some of which are listed below:

1. Lack of portfolio customization: Mutual fund unit-holder is just one of several thousand investors in a scheme. Once a unit-holder has bought into the scheme, investment management is left to the fund manager. Thus, the unit-holder cannot influence what securities or investments the scheme would buy.

2. Liquidity crisis: Mutual funds in India face liquidity problems. Investors are not able to draw back from some of the schemes due to lack of no easy exit route. Recently, we saw that Franklin Templeton has defaulted in redemption of mutual funds during lock down period.

3. Choice overload: Over 1,200 mutual fund schemes offered by 38 mutual funds – and multiple options within those schemes – make it difficult for investors to choose between them.

4. No control over costs: All the investor's moneys are pooled together in a scheme. Costs incurred for managing the scheme are shared by all the Unit holders in proportion to their holding of Units in the scheme. Therefore, an individual investor has no control over the costs in a scheme.

5. High Management Fee: The Management Fees charged by the fund reduces the return available to the investors.

In spite of the above disadvantages of mutual funds, this alternative is considered to be best and most rewarding investment vehicle in present world.

Or

b) Explain the duties of brokers. (10 marks)

Ans: Available in Video

Q.6. a) Who is a speculator? Explain different types of speculators operating in a stock exchange. (10 marks)

Ans: Speculators: Speculators are persons who buys or sale securities and derivatives contracts with a view to make profits by taking the advantage of fluctuations in prices in stock market. Speculators are short term investors and they take their decision on technical basis and by observing the prices of financial instruments in current market situations.  Speculators can also be called gamblers. A classic case is the trader who believes that the increasing demand or reduced supply is likely to boost the price of oil. Since it would be too expensive to buy and store actual oil, the trader buys exchange traded futures (ETFs) contracts agreeing to take delivery of oil on a future delivery date at a fixed price. If the oil prices rise in the market, the value of the futures contract will also rise and they can be sold back into the market at a profit. In fact, if the trader buys and then sells a futures contract before they reach the delivery date, the trader never has to take any delivery of actual oil. The profit from the whole trade is realized in cash without buying anything. 

Different Types of Speculators Operating in a Stock Exchange

Ans: Available in Video

Or

b) What do you mean by depository system? Explain the main features of the Depository Act. (4+6 = 10 marks)

Ans: Meaning of the Depository System: A depository is an organization that holds securities like shares, bonds, and government securities in an electronic or "dematerialized" form. In simple words, a depository acts as a central securities bank that manages and maintains electronic accounts for investors, known as Demat accounts.

Before this system, trading involved physically exchange of share certificates which led to risks like loss, forgery, damage during transit, and very slow transfers. The depository system solved these problems by ensuring ownership changes are made instantly through book-entry in demat account. The system makes the entire process of buying, selling, and holding securities secure, fast, and cost-effective.

Key Features of the Depository Act, 1996 are given below:

1.  Full SEBI Control on Depository: The depository system is strictly controlled by the market regulator SEBI. No company can act as a Depository without getting SEBI's permission.

2. Digital Securities in Demat account: This law made it legal to change physical share certificates into electronic form (Dematerialised form). All digital shares are treated the same, making them easy to trade.

3. Real Owner Rights: It separates ownership from holding. The Depository holds the shares legally, but the Beneficial Owner will get all the money on sale and also enjoy voting rights.

4. Broker Connection: Investors must deal with the Depository through agents called Depository Participants. Depository participants are normally stock brokers or banks.

5. Instant Transfer: Buying and selling shares is done quickly by simply updating a book-entry in demat account, eliminating the slow paperwork process.

6. Use Shares as Collateral: Shareholders are legally allowed to pledge their digital shares to get a loan from a bank.

7. Loss Protection: The Depository must pay to beneficial owner if they lose money due to depository’s mistake, error, or carelessness.

8. Penalties for Misconduct: The law gives SEBI the power to fine or penalize any Depository or Participant that breaks the rules or fails to help investors.

*******