Investing in Stocks
15 questions. Each answer is explained.
Question 1 of 10Practice · Series XXI-A — Portfolio Management Services (PMS) Distributors
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Learn these topics
More units in NISM Series XXI-A
- Investments11
- Introduction to Securities Markets7
- Investing in Fixed Income Securities8
- Derivatives7
- Collective Investment Vehicles8
- Role of Portfolio Managers15
- Operational Aspects of Portfolio Managers20
- Portfolio Management Process22
- Performance Measurement and Evaluation of Portfolio Managers15
- Taxation7
- Regulatory, Governance and Ethical Aspects of Portfolio Managers15
Exam format
| Questions | 100 · 1 mark each |
|---|---|
| Duration | 120 min · 2 hours |
| Pass mark | 60% · 60 of 100 marks |
| Negative marking | 10% · 0.1 marks off per wrong answer |
| Certificate validity | 3 years · from the date of the examination |
| Marks for this unit | Not published by NISM |
NISM Series XXI-A Portfolio Management Services (PMS) Distributors
Exam rules read on NISM's site on 3 October 2026. Check the current rules on NISM's site (opens in a new tab)
What these answers assume, and when it was last checked
Each question uses the rules listed below. We last checked them on 5 September 2026. A Budget or SEBI circular can change a rate, lot size or expiry day. If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.
- NSE uses Tuesday expiry and BSE uses Thursday expiry. This applies from 1 September 2025.
- The January 2026 index lot sizes are NIFTY 65, BANKNIFTY 30, FINNIFTY 60, MIDCPNIFTY 120 and NIFTYNXT50 25.
- The October 2024 SEBI framework sets a minimum index contract value of Rs 15–20 lakh. Each exchange may list one weekly benchmark index.
- Option buyers pay the premium upfront from 1 February 2025. A short index option has an extra 2% Extreme Loss Margin on expiry day from 20 November 2024.
- Equity short-term capital gains are taxed at 20%. Long-term gains are taxed at 12.5% above Rs 1.25 lakh. Both rates apply from 23 July 2024.
- F&O income is non-speculative business income in ITR-3. NSE equity derivatives trade from 9:15 a.m. to 3:40 p.m.
- The final ten-minute session began on 3 August 2026. It aligns with the cash market Closing Auction Session.
- Most Securities Transaction Tax questions test the base and who pays. On an option sale, it is the premium and the seller pays. On a futures sale, it is the traded value and the seller pays.
- On exercise, Securities Transaction Tax uses intrinsic value: settlement price minus strike price. The buyer pays it.
- Two questions test the current rate. From 1 April 2026, option sales carry 0.15% on the premium and futures sales carry 0.05% on traded price. The earlier rates were 0.10% and 0.02% from 1 October 2024.
- This section uses the T+1 rolling settlement cycle. Obligations are fixed on T+1. A short delivery goes to buy-in auction on T+1 and settles on T+2.
- The trade-for-trade surveillance segment uses direct close-out. Funds pay in by 10:30 a.m. and pay out on or after 1:30 p.m. on settlement day.
- Securities pay in to the settlement pool by 10:30 a.m. They pay out directly to the client’s demat account by 3:30 p.m.
- The 3:30 p.m. deadline replaced 1:30 p.m. under SEBI’s 10 October 2024 circular. Direct client credit was required by SEBI’s 5 June 2024 circular.
- The optional T+0 cycle trades until 1:30 p.m. Obligations are fixed by 2:30 p.m. on the trade day. An early pay-in shortage is closed out directly.
- Cash-market Value at Risk margin is six times exponentially weighted moving-average volatility. It has a 9% floor for Group I, a 21.5% floor for Group II, and a fixed 50% or 75% level for Group III.
- Extreme Loss Margin is 3.5% for a share and 2% for a broad-market-index exchange traded fund. Mark-to-market margin is collected before the next day’s trading. The trade-for-trade segment has 100% upfront margin.
- Close-out uses the higher of the highest price from trade day to auction day and 20% above the auction day’s official close.
- A funds shortage costs 0.07% a day. The trading facility is withdrawn at a shortage of Rs 5 lakh or more.
- SCORES allows 21 calendar days, then two 15-day review levels. Online Dispute Resolution moves from conciliation to arbitration after the market participant and SCORES steps.
- At NSE, the Investor Protection Fund limit is Rs 35 lakh per investor for each defaulting or expelled member. This applies to claims arising after 13 August 2024.
- A Basic Services Demat Account has no annual maintenance charge up to Rs 4 lakh of holdings. It costs up to Rs 100 above that, until the Rs 10 lakh eligibility ceiling. These slabs apply from 1 September 2024.
- The rupee pairs are USD-INR, EUR-INR, GBP-INR and JPY-INR. The cross-currency pairs are EUR-USD, GBP-USD and USD-JPY.
- Each contract covers 1,000 units of the foreign currency, except JPY-INR. JPY-INR covers 100,000 yen and is quoted in rupees per 100 yen.
- The tick is 0.25 paise, or Rs 0.0025. It equals Rs 2.50 a contract.
- Rupee pairs trade from 9:00 a.m. to 5:00 p.m. A monthly contract stops trading at 12:30 p.m. two working days before the expiry month’s last business day.
- Final settlement is in cash at the FBIL reference rate on expiry day. FBIL, Financial Benchmarks India, has published this rate in place of the Reserve Bank since 2018. Premium-style European options are quoted in rupees. The buyer pays the premium in cash on T+1.
- Daily settlement is on T+1 and final settlement is on T+2.
- NSE Clearing circular 026/2020 sets SPAN margin plus Extreme Loss Margin. The futures margin is 0.50% for USD-INR, 0.15% for EUR-INR, 0.25% for GBP-INR and 0.35% for JPY-INR. A short option has 0.75%. These figures apply from 1 June 2020.
- A USD-INR client may hold 6% of total open interest or USD 20 million, whichever is higher. A trading member may hold 15% or USD 100 million.
- A resident user has one USD 100 million equivalent limit across all rupee pairs and exchanges. No document is needed below that limit, but a valid underlying contracted exposure must still exist. This clarification applies from 3 May 2024.
- The currency segment has no Securities Transaction Tax.
The exam figures (questions, time, pass mark, negative marking and certificate validity) come from NISM's own pages, read on 3 October 2026. Timed practice uses the same figures. Study with the official workbook as well.
The written-out answers on this page are hidden while your timed set runs.
All 15 questions on Investing in Stocks, with answers
Q1Compared with a contractual debt claim, which feature most directly characterises ordinary equity capital?
Option A. It ranks ahead of every lender when the company is liquidated.
Why it is wrong: Residual equity does not have priority over prior-ranking debt obligations.
Option B. It has a residual claim after higher-ranking obligations are met. — Correct answer
Option C. It requires the company to pay the same fixed dividend every year.
Why it is wrong: An ordinary dividend is not the same as a contractual fixed-interest payment.
Option D. It fixes the date on which the shareholder’s money must be repaid.
Why it is wrong: Ordinary equity generally does not have the fixed repayment maturity characteristic of a bond.
Answer: B. Equity is ownership capital. Its payoff depends on the value remaining after higher-priority claims. A lender’s contract and an ordinary shareholder’s ownership interest are different claims. The residual nature permits participation in growth but also exposes shareholders to substantial downside when enterprise value falls. Remember: Equity ownership offers residual participation, not a fixed contractual return.
Hint, shown before you answer in practice mode: Common mistake: Confusing a company’s history of paying dividends with a contractual guarantee.
XXI-A-019easyconceptual
Q2An investor replaces one company’s shares with a broad portfolio across unrelated industries. Which risk is least likely to be eliminated by that change?
Option A. A disruption limited to one factory owned by one holding
Why it is wrong: The effect of an isolated company event is diluted in a broad portfolio.
Option B. A market-wide fall affecting equities broadly — Correct answer
Option C. A loss caused solely by one company’s product failure
Why it is wrong: Spreading holdings reduces dependence on one issuer’s specific outcome.
Option D. An accounting problem confined to a single small holding
Why it is wrong: A broad portfolio reduces concentration in that issuer, although it cannot guarantee no loss.
Answer: B. Diversification can reduce company-specific concentration but does not remove systematic market exposure. The portfolio changes the spread of issuer and industry exposures. A common market factor can still affect many holdings at once, so the broad-market risk is not eliminated. Remember: Diversification changes the composition of risk, not the existence of risk.
Hint, shown before you answer in practice mode: Common mistake: Treating a large number of holdings as protection against every market decline.
XXI-A-020mediumapplication
Q3An analyst first studies economic growth, then compares industries, and finally values companies in a selected industry. Which approach is being used?
Option A. Technical analysis based only on price patterns
Why it is wrong: The stated inputs are economic and business fundamentals, not only trading patterns.
Option B. Top-down fundamental analysis — Correct answer
Option C. Bottom-up analysis starting with a company
Why it is wrong: A bottom-up process begins with company-level opportunities rather than the sequence stated.
Option D. Mechanical equal weighting without security research
Why it is wrong: The analyst is conducting a selection process rather than assigning equal weights by rule.
Answer: B. Top-down analysis links economic conditions, industry prospects and company characteristics in that order. Identify the starting point: the analyst begins with the economic environment. Industry selection narrows the opportunity set before company valuation. That economy-industry-company sequence is top-down. Remember: Identify a research approach by its starting point and sequence.
Hint, shown before you answer in practice mode: Common mistake: Assuming that every fundamental analyst necessarily starts with an individual company.
XXI-A-021easyapplication
Q4An analyst identifies an apparently undervalued business from its cash generation and competitive position, then checks industry and economic risks. What best describes the starting approach?
Option A. Bottom-up fundamental analysis — Correct answer
Option B. Technical analysis because a market price is involved
Why it is wrong: Using market price in a valuation comparison does not make the analysis technical.
Option C. Pure index replication
Why it is wrong: The process selects a business on research merit rather than mechanically matching an index.
Option D. Top-down analysis because economic risks are eventually reviewed
Why it is wrong: Reviewing the economy later does not change the company-led starting point.
Answer: A. Bottom-up analysis starts with an individual company’s economics or valuation. It need not ignore the wider environment. The first filter is the firm’s cash generation, competitive position and assessed value. Later macroeconomic checks supplement that company-led process rather than converting it into top-down selection. Remember: Bottom-up does not mean that industry and macroeconomic risks can be ignored.
Hint, shown before you answer in practice mode: Common mistake: Defining an approach by any one input instead of the order and role of the inputs.
XXI-A-022mediumapplication
Q5A share trades at ₹540 and has earnings per share of ₹30 for the specified year. What is its price-to-earnings multiple on that earnings basis?
Option A. 16,200 times
Why it is wrong: Multiplying price by earnings per share uses the wrong operation.
Option B. 5.56 times
Why it is wrong: This resembles the inverse ratio expressed as a percentage, not the price-to-earnings multiple.
Option C. 570 times
Why it is wrong: Adding price and earnings per share does not produce a valuation multiple.
Option D. 18 times — Correct answer
Answer: D. The P/E multiple compares the market price of one share with earnings attributable to one share for a defined period. Use P/E = market price per share ÷ earnings per share. ₹540 ÷ ₹30 = 18 times. The specified earnings period matters when comparing this multiple with another company. Remember: Use consistent per-share figures and the same earnings basis for comparisons.
Hint, shown before you answer in practice mode: Common mistake: Mixing a share price with total company earnings.
XXI-A-023easynumerical
Q6A company has ₹400 crore of equity attributable to ordinary shareholders and 20 crore ordinary shares. At a market price of ₹60 per share, what is the price-to-book multiple?
Option A. 3 times — Correct answer
Option B. 0.15 times
Why it is wrong: This divides a per-share market price by total company equity without matching units.
Option C. 0.33 times
Why it is wrong: This reverses book value per share and market price.
Option D. 20 times
Why it is wrong: ₹20 is the book value per share, not the price-to-book multiple.
Answer: A. Price-to-book compares market value with the accounting equity attributable to the same ownership claim. Book value per ordinary share = ₹400 crore ÷ 20 crore shares = ₹20. P/B = ₹60 ÷ ₹20 = 3 times. The crore units cancel when calculating the per-share amount. Remember: Convert total book equity to a per-share amount before comparing it with a share price.
Hint, shown before you answer in practice mode: Common mistake: Dividing quantities expressed on different ownership bases.
XXI-A-024mediumnumerical
Q7Use enterprise value = equity market value + debt − cash. A company has equity value ₹1,000 crore, debt ₹250 crore, cash ₹100 crore and EBITDA ₹230 crore. What is EV/EBITDA?
Option A. 4.35 times
Why it is wrong: This uses equity market value alone and ignores debt and cash.
Option B. 5.87 times
Why it is wrong: This adds cash instead of subtracting it when calculating enterprise value.
Option C. 5.43 times
Why it is wrong: This adds debt but fails to subtract the stated cash.
Option D. 5.00 times — Correct answer
Answer: D. An enterprise-value multiple compares the value of operating capital claims with an operating earnings measure before financing costs. Apply the expressly supplied definition: EV = 1,000 + 250 − 100 = ₹1,150 crore. Divide ₹1,150 crore by ₹230 crore EBITDA to obtain 5.00 times. All figures use the same currency scale. Remember: Match an enterprise-level numerator with an enterprise-level earnings denominator.
Hint, shown before you answer in practice mode: Common mistake: Using equity value in an EV multiple or adding rather than subtracting cash.
XXI-A-025hardnumerical
Q8A share has a P/E of 24 and forecast annual earnings growth of 12%. Using the PEG convention with growth entered as the whole percentage number, what is the PEG ratio?
Option A. 200.00
Why it is wrong: This substitutes growth as a decimal even though the convention requires 12.
Option B. 288.00
Why it is wrong: This multiplies P/E and the growth number instead of dividing.
Option C. 2.00 — Correct answer
Option D. 0.50
Why it is wrong: This reverses the numerator and denominator.
Answer: C. PEG relates an earnings multiple to an assumed growth rate. Its value depends on the convention and credibility of the growth forecast. Use PEG = P/E ÷ growth expressed as a whole percentage number. Substitute 24 ÷ 12 = 2.00. A computed PEG does not establish that the growth forecast will be achieved. Remember: State and follow the growth-unit convention in PEG calculations.
Hint, shown before you answer in practice mode: Common mistake: Using 0.12 instead of 12 under the whole-percentage convention.
XXI-A-026mediumnumerical
Q9A share is expected to pay ₹6 at the end of one year and be worth ₹115 immediately after that payment. With a required annual return of 10%, what is its present value?
Option A. ₹104.55
Why it is wrong: This discounts the terminal price but omits the separate ₹6 payment.
Option B. ₹109
Why it is wrong: This subtracts the payment from the terminal price rather than adding the investor’s two receipts.
Option C. ₹110 — Correct answer
Option D. ₹121
Why it is wrong: This adds future cash flows without discounting them to the present.
Answer: C. A one-period valuation discounts the expected cash payment and the expected remaining asset value to today. Year-end value to the investor = ₹6 + ₹115 = ₹121. Present value = ₹121 ÷ 1.10 = ₹110. The terminal price is stated after the cash payment, so adding the payment does not double count it. Remember: Check whether the terminal price includes or excludes a separate distribution.
Hint, shown before you answer in practice mode: Common mistake: Ignoring a distribution or counting it twice.
XXI-A-027mediumnumerical
Q10For a simplified asset-based valuation, adjusted asset value is ₹600 crore, liabilities are ₹240 crore and 30 crore ordinary shares are outstanding. What value per share follows?
Option A. ₹12 — Correct answer
Option B. ₹8
Why it is wrong: This divides liabilities alone by the share count.
Option C. ₹28
Why it is wrong: This adds liabilities to assets rather than deducting prior claims.
Option D. ₹20
Why it is wrong: This uses gross assets without deducting liabilities.
Answer: A. An asset-based equity valuation deducts liabilities from the assessed value of assets before allocating value to ordinary shares. Net asset value attributable to ordinary equity = ₹600 crore − ₹240 crore = ₹360 crore. Per-share value = ₹360 crore ÷ 30 crore shares = ₹12. No additional claims or adjustments are assumed. Remember: Equity receives net asset value, not gross asset value.
Hint, shown before you answer in practice mode: Common mistake: Forgetting that liabilities rank ahead of ordinary equity.
XXI-A-028mediumnumerical
Q11A loss-making company has a negative P/E, while a profitable peer has a positive P/E. Which interpretation is most defensible?
Option A. The negative P/E should not be ranked as a cheaper positive earnings multiple. — Correct answer
Option B. The negative P/E means the company’s share price is negative.
Why it is wrong: A positive share price divided by negative earnings produces a negative multiple.
Option C. Both firms must have the same value if they are in the same industry.
Why it is wrong: Industry membership does not establish identical cash flows, risk or value.
Option D. The negative P/E proves the loss-making company is cheaper.
Why it is wrong: This treats a loss denominator as though it were positive earnings available to shareholders.
Answer: A. A valuation multiple needs an economically meaningful denominator. Losses can make a simple positive-P/E ranking inappropriate. A negative multiple may result from negative earnings rather than a low market valuation. Investigate the loss, normalisation assumptions and alternative valuation measures before making a comparison. Remember: Interpret the denominator before comparing the numerical size of valuation multiples.
Hint, shown before you answer in practice mode: Common mistake: Sorting P/E values from lowest to highest without checking whether earnings are positive.
XXI-A-029mediumapplication
Q12Two firms have comparable accounting measures, but one trades at a much higher P/E. Which investigation is most relevant before calling it overvalued?
Option A. Whether the most recent quarter alone proves that the premium will remain justified
Why it is wrong: A single quarter does not establish sustainable future earnings or the reasonableness of expectations.
Option B. Whether a higher multiple must imply overvaluation when both firms belong to the same industry
Why it is wrong: Common industry membership does not make growth, risk and earnings quality identical.
Option C. Whether differences in expected growth, risk and earnings sustainability explain the premium — Correct answer
Option D. Whether its share price is a larger rupee number
Why it is wrong: The absolute price per share does not account for the share count or establish relative valuation.
Answer: C. A relative valuation comparison requires comparable economics, not merely the same industry label or accounting ratio. The higher multiple is a fact to explain, not a complete conclusion about value. Review growth expectations, capital needs, risk and the persistence of earnings. The premium may still be unjustified if those assumptions are too optimistic. Remember: A higher multiple can reflect different expectations, but expectations must be examined.
Hint, shown before you answer in practice mode: Common mistake: Treating one ratio as a complete valuation without studying its drivers.
XXI-A-030mediumapplication
Q13A client holds 300 shares at ₹800 immediately before a two-for-one share split. Ignoring market movements, what is the theoretical new price per share?
Option A. ₹800
Why it is wrong: Keeping the price unchanged while doubling the share count would double wealth without a change in business value.
Option B. ₹400 — Correct answer
Option C. ₹200
Why it is wrong: This divides the price by four even though the share count only doubles.
Option D. ₹1,600
Why it is wrong: Doubling the price corresponds to the price direction of a consolidation, not a two-for-one split.
Answer: B. A share split changes the number of units representing ownership, not the investor’s proportional ownership by itself. The new count is 300 × 2 = 600 shares. Theoretical price is ₹800 ÷ 2 = ₹400. Both the old and new holdings equal ₹2,40,000 before unrelated price movements. Remember: A mechanical change in share count need not change wealth.
Hint, shown before you answer in practice mode: Common mistake: Counting extra shares as a gain without adjusting the per-share value.
XXI-A-031easynumerical
Q14Which research activity most directly illustrates technical analysis?
Option A. Discounting forecast business cash flows to estimate value
Why it is wrong: That is a fundamental valuation technique.
Option B. Studying price and trading-volume patterns for market behaviour — Correct answer
Option C. Estimating replacement value of operating assets
Why it is wrong: That is an asset-based fundamental valuation approach.
Option D. Assessing the sustainability of operating profit margins
Why it is wrong: That concerns business fundamentals rather than price-pattern analysis.
Answer: B. Technical and fundamental analysis use different primary inputs, although an analyst may consider both. Identify the data used in the activity rather than the security being analysed. Price and volume patterns are technical inputs. Cash flows, operating assets and margins are fundamental inputs. Remember: Classify analysis by its main evidence and method.
Hint, shown before you answer in practice mode: Common mistake: Calling any analysis of a listed share technical analysis.
XXI-A-032easyconceptual
Q15A firm reports rapid profit growth, but operating cash flow weakens while receivables rise much faster than sales. What is the most useful next research step?
Option A. Examine revenue recognition, collection quality and working-capital changes. — Correct answer
Option B. Ignore cash flow because profit already measures cash collected.
Why it is wrong: Accrual profit and cash receipts are not identical measures.
Option C. Conclude immediately that every reported sale is fraudulent.
Why it is wrong: The evidence justifies investigation but is not sufficient to prove that all sales are false.
Option D. Assume that a higher receivables balance always increases intrinsic value.
Why it is wrong: Receivables can require funding and may carry collection risk rather than adding value automatically.
Answer: A. Earnings quality analysis asks how accounting performance connects to cash generation and the economic substance of transactions. Compare the growth in sales, receivables and cash collected. Investigate changes in credit terms or recognition policies. Assess whether the working-capital build-up is temporary and recoverable or indicates weaker collections. Avoid a fraud conclusion without sufficient evidence. Remember: Treat a profit-cash-flow divergence as a research question, not an automatic verdict.
Hint, shown before you answer in practice mode: Common mistake: Equating reported profit with cash available to investors.
XXI-A-033hardapplication
Investing in Stocks: common questions
How many practice questions are there on Investing in Stocks?
15 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 12 practice topics for NISM Series XXI-A, which has 150 questions in total.
Are these real NISM Series XXI-A questions on Investing in Stocks?
No. LearnNifty wrote every question from NISM's public syllabus. NISM does not publish its question bank, so nobody can offer you the real paper. Use these questions to check that an idea has gone in. Use the official NISM workbook to see what is examined.
Does negative marking apply to NISM Series XXI-A?
Yes. NISM takes off 10% of a question's marks for a wrong answer. On a 1-mark question that is 0.1 marks off. A blank question earns nothing and loses nothing, so a wrong guess costs marks on this paper. Timed practice here uses the same rule.
Are these practice questions kept up to date?
Each question is written against the rules printed on this page, last checked on 5 September 2026. A Budget or a SEBI circular can change a rate, a lot size or an expiry day. If one of those rules changes before your exam, treat the questions that use it as out of date. Then check NISM's current workbook.
Investing in Fixed Income Securities
8 questions on Investing in Fixed Income Securities. Its quiz opens on that unit.
Open Investing in Fixed Income Securities