NISM Series XV Chapter 2 MCQs with Answers: Introduction to Securities Market
Practise 20 multiple-choice questions on securities markets, financial instruments, stock exchanges, market participants, derivatives and dematerialisation.
Preparing for the NISM Series XV Research Analyst Certification Examination? Strengthen your understanding of securities markets with these chapter-wise practice questions on Introduction to Securities Market.
This article contains 20 MCQs covering the definition of securities, the role of financial markets, equity and debt instruments, stock market indices, ETFs, primary and secondary markets, clearing corporations, depositories, custodians, alternative investment funds and derivatives.
Each question has four options and an expandable answer with an explanation. Attempt each question before revealing the correct answer to make your revision more effective.
Part 1: Securities Market Fundamentals
1. According to the Securities Contracts (Regulation) Act, 1956, which of the following is included in the definition of securities?
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Correct answer: C) Shares, scrips, bonds, derivatives and Government securities
The definition of securities under the Securities Contracts (Regulation) Act, 1956, covers several categories of financial instruments. These include shares, stocks, bonds, debentures, derivatives, units or other instruments issued by collective investment schemes, and Government securities, among other specified instruments.
The definition is broader than any single category of investment. For legal precision, refer to the current statutory text.
2. What is the primary function of the securities market?
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Correct answer: B) To facilitate the flow of capital
The securities market connects investors who have savings with companies, governments and other eligible issuers that require capital. Investors can purchase financial instruments, while issuers can raise funds for investment and other purposes.
Securities markets also support price discovery and liquidity. They do not guarantee risk-free returns.
3. Which debt instrument can be converted into equity shares of the issuing company at a future date?
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Correct answer: C) Convertible debentures
Convertible debentures are debt instruments that can be converted into equity shares according to the terms of issue. The conversion may occur on specified dates or when specified conditions are met.
They combine debt characteristics with the potential to become equity. Non-convertible debentures do not provide the same contractual conversion feature.
4. Which index represents 30 selected stocks listed on the Bombay Stock Exchange (BSE)?
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Correct answer: C) S&P BSE Sensex
The S&P BSE Sensex is a benchmark index comprising 30 selected companies listed on the BSE. It is designed to represent the performance of a selection of major companies in the Indian equity market.
The Sensex uses a free-float market-capitalisation methodology. This means the index calculation considers the market value of shares available for public trading, rather than simply weighting every company equally.
5. An investment vehicle that pools funds to track an index and is listed and traded on a stock exchange is known as:
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Correct answer: B) An Exchange Traded Fund (ETF)
An ETF is an investment fund whose units are traded on a stock exchange. Many ETFs track an index, while others may track a commodity or a basket of assets.
Unlike conventional mutual fund purchases that are generally processed at the applicable net asset value, ETF units can typically be bought and sold during exchange trading hours at market prices. The market price can differ from the fund's net asset value.
Part 2: Market Types and Corporate Issues
6. Depository Receipts issued in India and listed on an Indian stock exchange, with foreign shares as the underlying securities, are called:
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Correct answer: D) Indian Depository Receipts (IDRs)
IDRs are depository receipts issued in India that represent an interest in underlying securities of a foreign company, subject to the applicable framework.
ADRs are associated with the United States, while GDRs are generally used in international markets. These instruments differ in their issuance and listing arrangements.
7. Which segment of the securities market facilitates trading in securities that have already been issued?
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Correct answer: C) Secondary Market
The secondary market enables investors to buy and sell existing securities. It provides liquidity and supports price discovery after securities have been issued.
In contrast, the primary market is where issuers raise capital through new securities issues.
8. When an already-listed company makes a further public issue of securities, the issue is commonly known as a:
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Correct answer: B) Follow-on Public Offer (FPO)
An FPO is a further public offering by a company that is already listed. Depending on the offer structure, it may involve a fresh issue of shares, an offer for sale by existing shareholders, or both.
A rights issue is different because it offers securities to eligible existing shareholders according to the terms of the issue.
9. Shares issued to existing shareholders without additional consideration by capitalising eligible company reserves are called:
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Correct answer: C) Bonus shares
Bonus shares are additional shares allotted to existing shareholders without a separate payment, through capitalisation of eligible reserves or other permitted balances.
A bonus issue increases the number of shares held by shareholders but does not, by itself, increase the underlying value of their total investment. Market prices may adjust after the issue.
10. In which market are transactions negotiated between counterparties outside a central stock exchange order book?
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Correct answer: B) Over-the-Counter (OTC) market
In an OTC market, counterparties negotiate transactions directly or through dealers rather than trading through a central exchange order book.
OTC transactions can differ in standardisation, transparency, liquidity and counterparty risk. The exact trading and settlement arrangements depend on the instrument and applicable rules.
Part 3: Market Institutions and Investment Vehicles
11. Which institution acts as a central counterparty for eligible trades and supports settlement of transactions on a stock exchange?
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Correct answer: C) Clearing Corporation
A clearing corporation performs clearing and settlement functions and, where applicable, becomes the central counterparty to eligible transactions. It manages settlement obligations and associated risks under its rules.
Its role helps ensure that the securities and funds due from clearing members are delivered according to the applicable settlement framework.
12. Which institutions hold investors' securities in electronic, dematerialised form in India?
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Correct answer: B) Depositories
Depositories hold securities in electronic form and facilitate transfers through the dematerialised securities system. India has two principal depositories: the National Securities Depository Limited (NSDL) and the Central Depository Services (India) Limited (CDSL).
Investors typically access their demat holdings through a Depository Participant (DP).
13. Which entity is responsible for safekeeping funds and securities for institutional clients and settling transactions on their behalf?
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Correct answer: B) Custodian
A custodian provides safekeeping and related services for clients' financial assets. Depending on the mandate, services can include settlement support, transaction records, corporate-action processing and reporting.
Custodians are particularly relevant to institutional investors that hold large or complex portfolios.
14. Instruments issued by eligible SEBI-registered foreign portfolio investors to overseas investors seeking exposure to Indian securities are commonly known as:
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Correct answer: A) Participatory Notes (P-Notes)
Participatory Notes are offshore derivative instruments issued by eligible registered foreign portfolio investors to overseas clients, providing economic exposure to permitted Indian securities or other eligible instruments.
Their issuance and use are subject to SEBI regulations and reporting requirements. The regulatory framework should be checked for the latest conditions and restrictions.
15. A privately pooled investment vehicle established as a trust, company or LLP and regulated under India's AIF framework is called an:
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Correct answer: C) Alternative Investment Fund (AIF)
An Alternative Investment Fund is a privately pooled investment vehicle established in India that collects funds from eligible investors under a defined investment policy and is regulated under the applicable SEBI AIF framework.
AIFs are distinct from conventional mutual fund schemes. Their structure, investment strategy, eligibility and regulatory obligations depend on the relevant category and applicable rules.
Part 4: Settlement, Derivatives and Trading Concepts
16. What is a spot trade?
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Correct answer: C) Settlement according to the applicable spot-date convention
A spot transaction involves settlement on the standard spot date applicable to the market and instrument. In some foreign-exchange markets, spot settlement is commonly two business days after the trade date, but conventions vary by currency pair, product and market.
Do not assume that every spot transaction in every securities market settles exactly two business days after trading. The settlement cycle for a particular exchange-traded security may be different.
17. What is a standardised forward contract traded on an exchange called?
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Correct answer: B) Futures contract
A futures contract is a standardised agreement to buy or sell an underlying asset at a future date under specified terms. Exchange-traded futures typically specify contract size, expiry and other standard conditions.
Unlike a typical customised OTC forward contract, exchange-traded futures are governed by exchange rules and clearing arrangements.
18. Which option gives its buyer the right, but not the obligation, to buy an underlying asset at a specified price on or before a specified date, according to the contract terms?
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Correct answer: B) Call option
A call option gives its buyer the right, but not the obligation, to buy the underlying asset at the specified strike price. Whether exercise can occur only at expiry or at any time up to expiry depends on the option's exercise style.
The option buyer generally pays a premium for this right. The option writer has corresponding obligations under the contract.
19. What is the simultaneous purchase and sale of an asset, or equivalent exposures, to take advantage of price differences across markets called?
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Correct answer: C) Arbitrage
Arbitrage seeks to profit from price discrepancies for the same or economically equivalent assets across markets or related instruments. Transactions are structured to exploit the difference while managing exposure.
In practice, transaction costs, execution risk, funding costs and price movements can reduce or eliminate the apparent opportunity.
20. What is the process of converting securities held in physical certificates into electronic book-entry form called?
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Correct answer: B) Dematerialisation
Dematerialisation is the process of converting physical securities certificates into electronic holdings maintained through the depository system.
The reverse process, in which eligible electronic holdings are converted into physical certificates, is called rematerialisation.
Quick Revision Notes: Chapter 2
| Concept | Key point to remember |
|---|---|
| Securities Market | Connects providers of capital with entities seeking capital. |
| Convertible Debenture | Debt instrument that can convert into equity under specified terms. |
| S&P BSE Sensex | Benchmark index of 30 selected BSE-listed companies, using free-float market capitalisation. |
| ETF | Fund units traded on an exchange; many ETFs track an index or other assets. |
| Primary Market | Market where issuers raise capital through securities issues. |
| Secondary Market | Market for trading securities that have already been issued. |
| FPO | Further public offer by an already-listed company. |
| Bonus Shares | Additional shares allotted to eligible existing shareholders without separate payment. |
| Clearing Corporation | Performs clearing and settlement functions for eligible transactions. |
| Depository | Maintains securities in electronic form. |
| Custodian | Provides safekeeping and related asset services for clients. |
| Futures Contract | Standardised exchange-traded future contract. |
| Call Option | Buyer has the right to buy the underlying asset at the strike price. |
| Arbitrage | Seeks to profit from price discrepancies across markets or related instruments. |
| Dematerialisation | Conversion of physical securities into electronic holdings. |
Frequently Asked Questions
What does Chapter 2 of NISM Series XV cover?
This practice set covers securities market fundamentals, financial instruments, market segments, stock market institutions, investment vehicles, settlement concepts and derivatives.
How many MCQs are included in this Chapter 2 article?
This article contains 20 multiple-choice questions, each with four options and an expandable answer explanation.
Are these official NISM exam questions?
These are practice questions based on the material supplied for this article. They should not be treated as official past examination questions unless their official status is independently verified.
What is the difference between primary and secondary markets?
The primary market is where issuers raise funds by issuing securities. The secondary market enables investors to trade securities that have already been issued.
What is the difference between dematerialisation and rematerialisation?
Dematerialisation converts physical securities certificates into electronic holdings. Rematerialisation converts eligible electronic holdings into physical certificates.
What is the difference between futures and options?
A futures contract creates contractual obligations according to its terms. An option buyer has a right, but not an obligation, to exercise the option; the option writer has corresponding obligations.
Conclusion
Understanding the securities market is essential for anyone preparing to work as a research analyst. These concepts explain how capital is raised, how securities are traded, which institutions support settlement and safekeeping, and how different financial instruments operate.
Attempt all 20 questions, review the explanations and revisit concepts you find difficult. Use this article alongside the official NISM Series XV study material as part of your examination preparation.
Continue Your NISM Series XV Preparation
Review the previous chapter and continue building your knowledge one topic at a time.
Disclaimer: This article is intended for educational and examination-preparation purposes. It is not an official NISM publication. Refer to the official NISM study material and current regulatory information for authoritative requirements.
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