What do you understand by Securities Market? What are the different types of securities market?
Security market is a market where securities are issued and traded. It is the market for different types of securities namely: debt, equity and derivatives.
Debt market is further divided into three parts:
• Government securities market
• Money market
• Corporate Debt market
Equity market is divided into two parts:
• Primary market
• Secondary market
Derivatives market is also divided into two parts:
• Options market
• Futures market.
What is Derivatives? Give an example.
The word derivative refers to a variable which has been derived from another variable. Thus derivatives have no value of their own as they derive their value from the value of some other assets which is known as underlying asset. They are specialized contracts which signify an agreement to buy or sell the underlying asset of the derivate up to a certain time in the future at a predetermined price. The value of the contract depends on the expiry period and also on the price of the underlying asset. For example – Derivative contract on crude oil depends on the price of crude oil.
What are the advantages of Derivatives?
• Increased hedge for investors in cash market.
• Enhance price discovery process.
• Increases volume of transactions.
• Lower transaction costs.
• Increased liquidity for investors and growth of savings flowing into these markets.
• Leads to faster execution of trades and arbitrage and hedge against risk.
What are the characteristics of Government securities market?
• It is the largest segment of debt market in India.
• It accounts for nearly 2/3rd of the issues in primary market.
• It accounts for nearly 4/5th of the turnover in secondary market.
• Issues are regulated by RBI under Public Debt Act.
• These securities are issued through an auction mechanism.
• Perspective investors are banks, insurance companies, mutual funds, trusts, provident funds etc.
• These instruments can be traded in WDM segment of NSE which is fully automated screen based trading system.
What is Beta of an asset?
Beta of an asset is a way of measuring systematic risk of an asset. It shows how price of a security responds to changes in market price. It indicates the extent of movement of the returns of the stock with respect to the movement of market returns. Assets that are riskier than average will have Betas that exceed 1 and assets that are safer than average will have Betas lower than 1. The riskless asset will have a value of Beta=0. The Beta of the market portfolio or the average of Betas across all assets in the market is 1.
What do you understand by Stock market indices? Name the major stock market indices.
Stock market indices are used to measure the general movement of the stock market. It is used as a proxy for overall market movement. The major stock market indices are:
• Bombay Stock Exchange Sensitive Index (BSE) popularly known as Sensex. It reflects the movements of 30 sensitive shares from specified and non specified groups.
• S and P CNX nifty, known as Nifty Index. It reflects the movements of 50 scrips selected on the basis of market capitalization and liquidity.
What is the difference between Bombay Stock Exchange and National Stock Exchange?
• Bombay Stock Exchange index or Sensex was started in 1986 whereas National Stock Exchange index namely Nifty started in 1995.
• The base year for the sensex is 1978-79 and base value is 100 whereas the base year for nifty is 1994 and base value is 1000.
• BSE consists of 30 scrips whereas NSE consists of 50 scrips.
• BSE is screen based trading whereas NSE is ringless, national, computerized exchange.
• BSE has adopted both quote driven system and order driven system whereas NSE has opted for an order driven system.
What are the different types of Equity Market?
Equity market consists of primary market and secondary market.
Primary equity market – is also called new issues market as securities are issued to public for the very first time. In this market the new issues are made in following four ways:
• Public issue
• Rights issue
• Private placements
• Preferential allotment
Secondary equity market – also known as Stock exchanges which are an important part of capital market. It is an organized market place where securities are traded. These securities are issued by government, semi-government bodies, public sector undertakings, joint stock companies etc.
What do you understand by Money Market? Give an example.
Money market is the market where short term instruments of credit with a maturity period of one year or less than that are traded. Such instruments are known as near money. The borrowers of money market are traders, government, speculators and lenders in this market are commercial banks, central bank, financial institutions and insurance companies etc.
On what basis securities should be selected?
There are four factors which should be considered in selecting fixed income securities:
• Yield to maturity,
• Risk to default,
• Tax shield and
• Liquidity.
There are three approaches to selection of equity shares:
Fundamental analysis,
Technical analysis and
Random selection
What are the important macroeconomic indicators that influence stock market?
Following are the macroeconomic indicators that influence stock market:
• GDP Growth Rate
• Behaviour of monsoon and performance of agriculture
• Trends in public investment and savings
• Monetary and fiscal policy
• Economic and political stability
• Inflation
• Infrastructural facilities and arrangements
What is efficient market hypothesis?
Efficient market is one where the market price of the security is an unbiased estimate of its intrinsic value. The efficient market hypothesis is based on following assumptions:
• Market is perfect and free without any trade restrictions.
• Market absorbs all the information quickly and efficiently.
• Information is free and costless and is freely available to all at the same time.
• Information is fair and correct.
• Market players can analyze the information quickly and it is absorbed in the market through buy and sell signals.
What are the main phases of Portfolio management?
Portfolio management is the management of various financial assets that make a portfolio. There are following seven phases in portfolio management:
• Specification of Investment Objectives and Constraints
• Choice of Asset Mix
• Formulation of Portfolio Strategy
• Selection of Securities
• Portfolio Execution
• Portfolio Revision
• Portfolio Evaluation
Explain Fundamental analysis and Technical analysis.
Security analysis includes two types of analysis namely, fundamental analysis and technical analysis.
Fundamental analysis takes into account three types of analysis:
• Economy analysis
• Industry analysis
• Company analysis
Technical analysis helps in forecasting the future price of share on basis of historical movements of price.
What are the types of Risks?
Generally there are two types of risk:
Systematic risk and
Unsystematic risk.
Systematic risks are:
• Market risk
• Purchasing power risk
• Interest rate risk
Unsystematic risks are:
• Business risk
• Financial risk
• Liquidity risk
• Default risk
What are the basic principles of Dow’s Theory?
Dow’s Theory is the oldest and the most known theories of technical analysis. It was proposed by Charles H. Dow. Dow’s theory has put forward six basic principles:
• The averages discount everything.
• Market has three main movements. These are primary, secondary and minor movements.
• Lines indicate movements. Such a movement indicates either accumulation or distribution.
• Price-volume relationships provide background.
• The price action determines the trend in the market.
• The averages must confirm i.e. the movements of two different market indices must confirm each other to confirm the overall trend.
What are the significant factors to company analysis?
Company analysis is a part of Fundamental analysis. Following factors are significant to company analysis:
• Marketing Policies
• Accounting Policies
• Profitability
• Dividend Policy
• Capital Structure
• Management
• Financial statement analysis
What are the assumptions on which CAPM is based? What are the essential elements of CAPM?
CAPM (Capital Asset Pricing Model) is a risk and return model. It predicts the relationship between risk of an asset and its expected result.
This model assumes that:
• Investors are risk averse.
• Investors are known with all the market fluctuations and information.
• There are no restrictions and transaction costs on investment.
• Information available in the market will be digested by the capital markets.
• Investors have identical time horizons.
• Investors have homogeneous expectations about risk and return of securities.
The essential elements of CAPM are:
• Risk free rate
• Market Risk Premium
• Beta of the security
What is Mutual Fund? State types of mutual funds schemes.
Mutual Fund is an association which pools the savings of the investors who share common financial goals. The money collected by number of investors is invested in different types of financial instruments for the mutual benefit of its members. The income earned on these investments is then shared by the unit holders in proportion to the number of units held by them. A mutual fund has sponsor, trustees, asset Management Company and custodian. Mutual funds schemes are classified on the following basis:
• Maturity Period – Open ended and closed ended schemes.
• Investment Objective – Growth scheme, Income scheme, and balanced scheme.
• Other schemes – Liquid fund, Gilt fund Index fund, Sector fund and Tex saving fund.
What are the rights and obligations of the buyer and seller for the Call and Put options?
Rights and Obligations of the Buyer for Call Option:
• Pays premium
• Right to exercise and buy the shares
• Profits from rising prices
• Limited losses, unlimited gain
Rights and Obligations of the Seller for Call Option:
• Receives premium
• Obligation to sell shares if exercised
• Profits from falling prices or remaining neutral
• Unlimited losses, limited gain
Rights and Obligations of the Buyer for Put option:
• Pays premium Right to exercise and sell shares
• Profits from falling prices
• Limited losses, unlimited gain
Rights and Obligations of the Seller for Put option:
• Receives premium
• Obligation to buy shares if exercised
• Profits from rising price or remaining neutral
• Potentially unlimited losses, limited gain
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