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Unit study guide · NISM Series XII

Understanding Securities Markets and Performance

15 questions in this unit

What this unit covers

Key ideas

From the practice bank · 1

What is the main economic purpose of a securities market?

A securities market connects investors with issuers that need capital. It helps savings finance business and government activity. Remember: Securities markets connect savings with capital needs.

Hint Common mistake: Confusing access to capital with a guarantee of success. Think about the connection between surplus money and funding needs.

XII-001

From the practice bank · 2

Which responsibility belongs to SEBI as the Indian securities-market regulator?

SEBI protects investors and regulates and develops the securities market. Its role is oversight rather than choosing each investor’s portfolio. Remember: Securities-market regulation is different from monetary policy or investment management.

Hint Common mistake: Confusing the duties of SEBI with those of a central bank. Separate oversight of securities markets from central banking and portfolio management.

XII-002

From the practice bank · 3

A municipality raises money by selling bonds. What is its role in this transaction?

The municipality is the issuer because it sells its bonds to raise money. Remember: Governments and municipalities can issue securities.

Hint Common mistake: Assuming that only private companies can issue securities. Focus on which party creates the security to obtain funds.

XII-003

From the practice bank · 4

Which instrument represents an ownership interest rather than a loan to a company?

An equity share represents ownership in a company. Debt instruments represent borrowing obligations instead. Remember: Equity is ownership and debt is lending.

Hint Common mistake: Treating all company-issued instruments as ownership interests. Distinguish an owner from a lender.

XII-004

From the practice bank · 5

Which security practice helps protect a trading account against unauthorised access?

An additional authentication factor adds a separate check beyond the password. It reduces the chance of access through a stolen password alone. Remember: Protect account access with more than one authentication check.

Hint Common mistake: Assuming that a password alone provides complete protection. Think about adding another check when someone signs in.

XII-005

From the practice bank · 6

A company issues bonds to expand production. A household buys them. Which description correctly identifies their roles?

The company demands capital and the household supplies it. The bond records the company’s obligation to its investor. Remember: Follow the cash flow to distinguish issuers from investors.

Hint Common mistake: Confusing the flow of securities with the opposite flow of money. Trace the direction in which the subscription money moves.

XII-006

From the practice bank · 7

How does an active resale market support the market for new securities?

An active resale market gives investors an exit route. That can make them more willing to buy newly issued securities. Remember: Secondary-market supports primary-market participation.

Hint Common mistake: Assuming that an exit route means an assured selling price. Think about why an investor values the ability to sell later.

XII-007

From the practice bank · 8

What does price discovery in a securities market mainly describe?

Price discovery is the process through which buying and selling interest helps establish market prices. Remember: Market prices reflect interactions among buyers and sellers.

Hint Common mistake: Treating a discovered market price as a guaranteed fair value. Think about how competing orders arrive at a traded price.

XII-008

From the practice bank · 9

Why can a transferable security offer more flexibility than a non-transferable financial claim?

A transferable security allows its holder to pass the claim to another investor. The transfer remains subject to its terms and market conditions. Remember: Transferability improves flexibility without guaranteeing liquidity or profit.

Hint Common mistake: Confusing the ability to transfer with the ability to sell without loss. Focus on what can happen to the ownership of the claim.

XII-009

From the practice bank · 10

Which description best distinguishes a custodian from an investment decision-maker?

A custodian provides safekeeping and related services for investment assets. Choosing the portfolio is a separate function. Remember: Custody and investment management serve different purposes.

Hint Common mistake: Assuming that holding assets in custody means selecting those assets. Separate safekeeping from deciding what to buy.

XII-010

From the practice bank · 11

A trading website becomes unavailable during an attack. Which measure most directly supports its recovery?

Tested backups and a recovery plan help restore disrupted operations. Recovery capability is an important part of cyber resilience. Remember: Cyber resilience includes restoring services after an incident.

Hint Common mistake: Focusing only on preventing attacks and ignoring recovery. Think about restoring operations after disruption.

XII-011

From the practice bank · 12

What is the main purpose of a regulatory sandbox for financial innovation?

A regulatory sandbox allows controlled testing of financial innovations. It is not a general exemption from safeguards or supervision. Remember: A sandbox supports controlled experimentation.

Hint Common mistake: Treating sandbox admission as full regulatory approval. Think of a limited testing environment rather than a permanent exemption.

XII-012

From the practice bank · 13

A business needs permanent capital. Investors want an eventual exit. Which arrangement can address both needs without requiring the business to redeem shares?

Equity can remain with the business while investors exit by selling their shares to other investors. A resale changes ownership rather than withdrawing the company’s original capital. Remember: Permanent issuer funding can coexist with investor transferability.

Hint Common mistake: Assuming every investor exit requires repayment by the company. Separate the company’s financing from an investor’s later sale.

XII-013

From the practice bank · 14

An investor asks who executes an exchange order and who maintains electronic holdings. Which pairing correctly separates these functions?

A stock broker provides access to exchange order execution, while the depository system maintains electronic securities holdings. These functions support different stages of investing. Remember: Execution and electronic holding records are distinct market functions.

Hint Common mistake: Assuming one intermediary performs every stage of a securities transaction. Treat placing a trade and keeping ownership records as separate jobs.

XII-014

From the practice bank · 15

A firm blocks unauthorised access but has never tested service restoration. A second firm tests both controls. Which assessment is strongest?

The second firm has tested both protection and recovery. The first firm has not demonstrated that it can restore operations after an incident. Remember: Cybersecurity controls and recovery testing complement each other.

Hint Common mistake: Equating successful prevention controls with proven recovery capability. Compare preventing disruption with recovering after disruption.

XII-015

Read the related lesson

Liquidity

Liquidity describes how easily a given quantity can be traded.

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