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GNDU QUESTION PAPERS 2022
BBA 6
th
SEMESTER
Paper-BBA-604: FUNDAMENTALS OF CAPITAL MARKET
Time Allowed: 3 Hours Maximum Marks: 50
Note: Aempt Five quesons in all, selecng at least One queson from each secon. The
Fih queson may be aempted from any secon. All quesons carry equal marks.
SECTION-A
I What is Capital Market? Describe the structure of Indian capital market.
II Write a note on New Issue Market.
SECTION-B
IIIL Describe the various parcipants of capital market and their roles. 10
IV. What do you mean by derivave contract? Explain its various types.
SECTION-C
V. Briey explain the rules applicable for taking membership of a stock exchange. 10
VL. What is a stock exchange? Briey explain about various stock exchanges of India. 10
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SECTION-D
VII. Explain, how the lisng of securies is done in a stock exchange.
VIII. What is the security market index? Explian how it is constructed.
GNDU Answer PAPERS 2022
BBA 6
th
SEMESTER
Paper-BBA-604: FUNDAMENTALS OF CAPITAL MARKET
Time Allowed: 3 Hours Maximum Marks: 50
Note: Aempt Five quesons in all, selecng at least One queson from each secon. The
Fih queson may be aempted from any secon. All quesons carry equal marks.
SECTION-A
I What is Capital Market? Describe the structure of Indian capital market.
Ans: What is a Capital Market?
Imagine you have a great business idea—maybe you want to open a factory or start a big
company. But there’s one problem: you don’t have enough money. On the other side, there
are people who have savings and want to invest their money to earn profits.
Now, what connects these two groups?
That connecting bridge is called the Capital Market.
Simple Definition:
A capital market is a place where long-term funds (money) are raised and invested. It
allows companies, governments, and institutions to raise money for long periods (usually
more than 1 year).
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Example to Understand
• A company like Reliance wants ₹10,000 crore to expand.
• It issues shares or bonds in the market.
• Investors (people like you and me, or big institutions) buy them.
• The company gets money, and investors get returns.
This entire process happens through the capital market.
Main Features of Capital Market
• Deals in long-term finance
• Helps in economic growth
• Provides investment opportunities
• Includes instruments like:
o Shares (Equity)
o Debentures
o Bonds
Structure of Indian Capital Market
The Indian Capital Market is not just one system—it is a well-organized structure made up
of different parts working together.
Let’s break it down step by step.
Primary Market (New Issue Market)
This is where new securities are issued for the first time.
What happens here?
• Companies raise fresh capital.
• Investors buy securities directly from the company.
Example:
When a company launches an IPO (Initial Public Offering), it is part of the primary market.
Example: When companies like Zomato or LIC launched IPOs.
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Key Methods:
• IPO (Initial Public Offering)
• FPO (Follow-on Public Offer)
• Private Placement
Secondary Market (Stock Market)
After securities are issued, they are traded in the secondary market.
What happens here?
• Investors buy and sell among themselves.
• The company does not get money again.
Example:
If you buy shares of a company from someone on the stock exchange, it’s secondary market.
Major Stock Exchanges in India
• BSE (Bombay Stock Exchange) – One of the oldest exchanges in Asia
• NSE (National Stock Exchange) – Largest in India by volume
These exchanges provide a platform for trading securities.
Financial Institutions
These are the backbone of the capital market.
Examples:
• Banks
• Insurance companies
• Mutual funds
Role:
• Provide funds
• Act as intermediaries
• Help in investment and risk management
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Regulatory Bodies
To ensure fairness and transparency, the capital market needs regulation.
Main Authority:
• SEBI (Securities and Exchange Board of India)
Functions of SEBI:
• Protect investors
• Regulate stock exchanges
• Prevent fraud and unfair practices
Without SEBI, the market could become risky and chaotic.
Intermediaries
These are the middlemen who help in smooth functioning.
Examples:
• Brokers
• Underwriters
• Merchant bankers
• Depositories (like NSDL, CDSL)
Role:
• Help investors buy/sell securities
• Provide advice and services
Flow of Capital Market
Savers (Investors)
↓
Intermediaries (Banks, Brokers)
↓
Capital Market (Primary + Secondary)
↓
Companies / Government
↓
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Returns (Profit, Interest, Dividends)
↓
Back to Investors
Importance of Indian Capital Market
• Helps in economic development
• Encourages savings and investment
• Provides liquidity (easy buying/selling)
• Supports industrial growth
• Generates employment
II Write a note on New Issue Market.
Ans: Introduction
When we talk about the capital market, it is broadly divided into two segments: the primary
market and the secondary market. The New Issue Market (NIM) is essentially the primary
market, where companies raise fresh capital by issuing securities for the first time. Unlike
the secondary market, where existing securities are traded among investors, the new issue
market deals with the creation and sale of new securities.
Think of it like this: if the secondary market is a resale shop where people buy and sell used
items, the new issue market is the factory outlet where brand-new products are introduced
to the public for the very first time.
Meaning of New Issue Market
The New Issue Market refers to the market where new securities are issued and sold to
investors directly by companies. These securities can be shares, debentures, or bonds. The
funds raised are used by companies for expansion, modernization, diversification, or
repayment of debts.
It is called the “primary market” because it is the first point of contact between investors
and companies.
Methods of Raising Funds in the New Issue Market
1. Public Issue through Prospectus
• Companies invite the general public to subscribe to their shares or debentures.
• A prospectus is issued, containing details about the company, its financial position,
and the terms of the issue.
• This is the most common method of raising funds.
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2. Offer for Sale
• Securities are first sold to intermediaries (like issuing houses or brokers).
• These intermediaries then sell them to the public.
• This method ensures wider distribution of securities.
3. Private Placement
• Securities are sold directly to a small group of investors, such as financial institutions
or wealthy individuals.
• This method is quicker and less expensive compared to a public issue.
4. Rights Issue
• Existing shareholders are given the right to subscribe to new shares in proportion to
their current holdings.
• This protects the ownership rights of existing investors.
5. Preferential Allotment
• Shares are issued to select investors at a preferential price.
• Often used to bring in strategic partners or institutional investors.
Role of Intermediaries in the New Issue Market
The new issue market involves several intermediaries who help companies raise funds:
• Merchant Bankers: Manage the issue process, prepare prospectus, and ensure
compliance with regulations.
• Underwriters: Guarantee the subscription of securities. If the public does not buy all
the shares, underwriters purchase the remaining.
• Brokers and Sub-brokers: Help distribute securities to investors.
• Registrars and Transfer Agents: Handle applications, allotment, and transfer of
shares.
Importance of New Issue Market
1. Mobilization of Savings
o Converts household savings into productive investments.
2. Capital Formation
o Provides funds for industrial growth and infrastructure development.
3. Economic Development
o Helps companies expand, modernize, and create employment.
4. Investor Opportunities
o Allows investors to participate in the growth of companies from the very
beginning.
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Diagram for Better Understanding
New Issue Market (Primary Market)
|
----------------------------
| | |
Public Issue Rights Issue Private Placement
| | |
General Public Existing Select Investors
Shareholders
Challenges of the New Issue Market
1. High Costs: Public issues involve heavy expenses on advertising, printing, and
compliance.
2. Risk of Under-subscription: If investors are not confident, the issue may fail.
3. Regulatory Compliance: Companies must follow strict SEBI guidelines, which can be
complex.
4. Investor Awareness: Many small investors lack knowledge about how to evaluate
new issues.
Recent Trends in New Issue Market
• Book Building Process: Investors bid for shares, and the final price is determined
based on demand.
• Electronic IPOs (e-IPOs): Issues are now managed online, making the process faster
and more transparent.
• Increased Role of Institutional Investors: Mutual funds, insurance companies, and
foreign institutional investors dominate the market.
• Focus on Startups: With SEBI’s relaxed norms, startups and tech companies are
increasingly raising funds through IPOs.
Conclusion
The New Issue Market is the gateway through which companies raise fresh capital and
investors get the chance to participate in new ventures. It plays a vital role in mobilizing
savings, promoting industrial growth, and driving economic development. While challenges
like high costs and regulatory hurdles exist, innovations like book building and electronic
IPOs have made the process more efficient.
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SECTION-B
IIIL Describe the various parcipants of capital market and their roles.
Ans: 1. Investors – The Providers of Money
Investors are the heart of the capital market. They are the people or institutions who put
their money into securities like shares, bonds, or mutual funds.
Types of Investors:
• Individual investors – Common people like you and me
• Institutional investors – Big players like banks, insurance companies, pension funds
Their Role:
• Provide funds to companies and governments
• Take risks in expectation of returns (dividends, interest, capital gains)
• Help in economic growth by supporting businesses
Example: When you buy shares of a company, you become a part-owner and help that
company raise funds.
2. Companies (Issuers) – The Fund Seekers
Companies are the ones who need money to expand their business, build factories, or
launch new products.
Their Role:
• Issue shares or bonds to raise long-term funds
• Offer investment opportunities to the public
• Use funds for growth and development
Example: A company launching an IPO (Initial Public Offering) is inviting investors to
invest in its future.
3. Government – The Borrower and Regulator
The government plays a dual role in the capital market.
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As a Borrower:
• Issues government bonds and securities
• Raises money for infrastructure, development projects, etc.
As a Regulator:
• Ensures the market runs fairly and transparently
• Protects investors from fraud
In India, the Securities and Exchange Board of India (SEBI) acts as the main regulator.
4. Financial Intermediaries – The Middle Helpers
These are institutions that connect investors with companies. They make the investment
process easier and safer.
Key Intermediaries:
• Banks
• Mutual funds
• Insurance companies
• Investment firms
Their Role:
• Collect money from investors
• Invest it in different securities
• Reduce risk through diversification
• Provide professional management
Example: Mutual funds invest your money in many companies instead of just one.
5. Stock Exchanges – The Marketplace
Stock exchanges are the platforms where buying and selling of securities happen.
Examples:
• Bombay Stock Exchange (BSE)
• National Stock Exchange (NSE)
Their Role:
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• Provide a transparent trading platform
• Ensure fair pricing through demand and supply
• Maintain liquidity (easy buying and selling)
Think of it like a digital market where shares are traded every second.
6. Brokers and Dealers – The Traders
Brokers and dealers act as agents between investors and the stock exchange.
Their Role:
• Execute buy and sell orders
• Provide investment advice
• Help investors access the stock market
Example: When you buy shares through an app, a broker is working behind the scenes.
7. Merchant Bankers – The Issue Managers
Merchant bankers help companies raise money from the public.
Their Role:
• Manage IPOs and new issues
• Advise companies on financial strategies
• Ensure legal compliance
They act like “project managers” for companies entering the capital market.
8. Depositories – The Safe Keepers
Gone are the days of physical share certificates. Depositories store securities in electronic
form.
Examples:
• NSDL (National Securities Depository Limited)
• CDSL (Central Depository Services Limited)
Their Role:
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• Hold securities safely in digital format
• Transfer ownership easily
• Reduce fraud and paperwork
Just like a bank keeps your money safe, depositories keep your shares safe.
9. Credit Rating Agencies – The Risk Analysts
These agencies evaluate how safe an investment is.
Examples:
• CRISIL
• ICRA
Their Role:
• Assign ratings to bonds and companies
• Help investors understand risk levels
• Improve transparency
A higher rating means lower risk.
10. Regulators – The Watchdogs
Regulators ensure that everything runs smoothly and fairly.
Key Regulator in India:
• SEBI (Securities and Exchange Board of India)
Their Role:
• Protect investors
• Prevent fraud and insider trading
• Maintain market discipline
Without regulators, the market could become unsafe and chaotic.
Conclusion
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The capital market is like a well-organized ecosystem, where:
• Investors bring money
• Companies & government need money
• Intermediaries connect both
• Stock exchanges provide the platform
• Brokers help in trading
• Depositories keep securities safe
• Rating agencies guide risk
• Regulators ensure fairness
All these participants work together like parts of a machine. If even one part fails, the whole
system can be affected. But when everyone performs their role properly, the capital market
becomes a powerful tool for economic growth, wealth creation, and financial stability.
IV. What do you mean by derivave contract? Explain its various types.
Ans: Introduction
In the world of finance, one of the most fascinating and sometimes intimidating concepts is
the derivative contract. At first glance, the word “derivative” might sound technical, but the
idea is actually quite simple: a derivative is a financial instrument whose value is derived
from the value of another underlying asset.
Think of it like this: if you buy a movie ticket, the ticket itself doesn’t have much value—it’s
just a piece of paper. Its value comes from the movie you’re going to watch. Similarly, a
derivative contract doesn’t have independent value; it depends on something else, like
shares, commodities, currencies, or interest rates.
Meaning of Derivative Contract
A derivative contract is an agreement between two or more parties whose value is based
on an underlying asset. The underlying asset could be:
• Shares of a company
• Commodities like gold, oil, or wheat
• Currencies like the dollar or euro
• Market indices like Nifty or Sensex
• Interest rates
The purpose of derivatives is often to hedge risks, speculate for profit, or facilitate
arbitrage opportunities.
Types of Derivative Contracts
Now let’s explore the main types of derivative contracts in a simple, engaging way.
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1. Forward Contracts
• A forward contract is a private agreement between two parties to buy or sell an
asset at a specified price on a future date.
• Example: A farmer agrees to sell wheat to a trader at ₹2,000 per quintal after three
months.
• Key Features: Customized, traded over-the-counter (OTC), and carries counterparty
risk (risk that one party may default).
2. Futures Contracts
• A futures contract is similar to a forward contract but standardized and traded on
stock exchanges.
• Example: An investor buys a futures contract for crude oil at a fixed price, expecting
the price to rise.
• Key Features: Standardized terms, regulated by exchanges, margin requirements,
and daily settlement reduce default risk.
3. Options Contracts
Options give the buyer the right but not the obligation to buy or sell an asset at a
predetermined price within a specified time.
• Call Option: Right to buy an asset. Example: An investor buys a call option to
purchase shares of Reliance at ₹2,500. If the price rises to ₹3,000, the investor
profits.
• Put Option: Right to sell an asset. Example: An investor buys a put option to sell
shares at ₹2,000. If the price falls to ₹1,500, the investor is protected.
Options are powerful tools for hedging and speculation.
4. Swaps
A swap is an agreement between two parties to exchange cash flows or financial
instruments.
• Interest Rate Swap: One party exchanges fixed interest payments for floating
interest payments.
• Currency Swap: Two parties exchange cash flows in different currencies.
Swaps are mainly used by large institutions to manage risks related to interest rates and
currencies.
Importance of Derivatives
1. Risk Management (Hedging)
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o Farmers, exporters, and investors use derivatives to protect themselves
against price fluctuations.
2. Speculation
o Traders use derivatives to bet on future price movements and earn profits.
3. Price Discovery
o Futures and options markets help in determining the fair value of assets.
4. Liquidity
o Derivatives increase market liquidity by allowing more participants to trade.
Diagram for Better Understanding
Derivative Contracts
|
----------------------------
| | |
Forwards Futures Options
| |
Private Deal Exchange- Call Option (Right to Buy)
Traded Put Option (Right to Sell)
|
Swaps (Exchange of Cash Flows)
Advantages of Derivatives
• Provide a mechanism for hedging risks.
• Facilitate speculation and profit opportunities.
• Help in efficient allocation of capital.
• Enhance liquidity in financial markets.
Limitations of Derivatives
• High risk if used for speculation without proper knowledge.
• Complex instruments that require expertise.
• Potential for misuse leading to financial instability (as seen in global crises).
Conclusion
A derivative contract is a financial agreement whose value depends on an underlying asset.
The main types are forwards, futures, options, and swaps. Each serves different purposes—
hedging risks, speculating for profit, or managing cash flows. While derivatives are powerful
tools that add depth and efficiency to financial markets, they must be used carefully
because of their complexity and risk.
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SECTION-C
V. Briey explain the rules applicable for taking membership of a stock exchange.
Ans: 1. Basic Eligibility Requirements
First of all, a person or entity must meet certain basic qualifications.
• The applicant should be at least 21 years old.
• He/she must be a citizen of India (in most cases).
• The person should not be declared insolvent (bankrupt).
• The applicant must have a good reputation and clean financial background.
Think of this like applying for a job—your background and credibility matter a lot.
2. Educational and Professional Qualification
Stock exchanges require members to have proper knowledge of financial markets.
• The applicant should have basic educational qualifications (usually graduation).
• They must pass certain certification exams, like those conducted by financial
authorities.
• Knowledge of stock market operations, rules, and regulations is essential.
This ensures that members know what they are doing and don’t make careless mistakes
that could harm investors.
3. Financial Soundness
This is one of the most important rules.
• The applicant must have adequate financial resources.
• They should maintain a minimum capital requirement as prescribed by the stock
exchange.
• They must deposit security deposits or margins.
Why? Because trading involves risk. The exchange wants to make sure that members
can handle losses and fulfill their obligations.
4. Registration with Regulatory Authority
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No one can become a member without proper legal approval.
• The applicant must register with the regulatory body (like SEBI in India).
• They need to obtain a trading license.
• Compliance with all legal and regulatory requirements is mandatory.
This step ensures that the system remains fair, transparent, and trustworthy.
5. Membership Approval by Stock Exchange
Even if you meet all conditions, final approval is given by the stock exchange itself.
• The exchange reviews the application carefully.
• It checks the applicant’s background, financial status, and qualifications.
• If satisfied, the exchange grants membership or trading rights.
It’s like getting selected after an interview—you must meet all expectations.
6. Compliance with Rules and Regulations
After becoming a member, the work doesn’t stop.
• Members must follow strict rules of the stock exchange.
• They must maintain proper records and accounts.
• They should follow ethical practices and avoid fraud.
If a member violates rules, their membership can be suspended or cancelled.
7. Infrastructure and Technology Requirements
In today’s digital world, trading is done electronically.
• Members must have proper trading systems and software.
• They need secure internet connectivity and terminals.
• Proper risk management systems must be in place.
This ensures smooth and safe trading operations.
8. Code of Conduct
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Members must behave responsibly.
• They should act in the interest of clients and investors.
• No manipulation, insider trading, or unfair practices.
• Maintain honesty, transparency, and professionalism.
This builds trust in the stock market.
9. Payment of Fees
To become a member, certain fees must be paid.
• Admission fees
• Annual membership fees
• Other charges as prescribed by the exchange
This is similar to paying fees to join a club or institution.
Final Understanding
So, becoming a member of a stock exchange is not just about filling out a form—it’s a
serious responsibility. The rules ensure that only qualified, financially stable, and ethical
individuals are allowed to participate.
In simple words:
“A stock exchange member must be educated, financially strong, legally approved,
and ethically responsible.”
Conclusion
The rules for membership of a stock exchange are designed to protect investors and
maintain the integrity of the financial system. By ensuring that only capable and trustworthy
individuals become members, the stock exchange creates a safe environment for trading.
If these rules didn’t exist, anyone could enter the market, leading to fraud, losses, and
chaos. So, these rules are not restrictions—they are safeguards that keep the stock market
running smoothly.
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VL. What is a stock exchange? Briey explain about various stock exchanges of India.
Ans: Introduction
A stock exchange is like the heartbeat of the financial world. It is a marketplace where
buyers and sellers come together to trade securities such as shares, bonds, and debentures.
In simple terms, it is the platform that connects companies in need of funds with investors
who want to grow their wealth.
Imagine it as a giant meeting hall: companies stand on one side, offering pieces of
ownership (shares), while investors stand on the other side, ready to buy those pieces. The
stock exchange ensures that this meeting is fair, transparent, and regulated.
Meaning of Stock Exchange
A stock exchange is an organized market where securities are listed and traded under strict
rules and regulations. It provides:
• Liquidity: Investors can easily buy or sell securities.
• Price Discovery: Demand and supply determine the fair value of securities.
• Safety and Regulation: Exchanges operate under the supervision of SEBI (Securities
and Exchange Board of India).
Thus, a stock exchange is not just a trading platform—it is a pillar of economic growth.
Functions of Stock Exchange
1. Mobilization of Savings: Converts household savings into productive investments.
2. Capital Formation: Helps companies raise funds for expansion.
3. Liquidity: Investors can sell securities whenever they want.
4. Fair Valuation: Prices are determined transparently by market forces.
5. Investor Protection: Rules and regulations safeguard investors against fraud.
Major Stock Exchanges in India
India has several stock exchanges, but two dominate the scene: BSE (Bombay Stock
Exchange) and NSE (National Stock Exchange). Let’s explore them along with a few others.
1. Bombay Stock Exchange (BSE)
• Established in 1875, it is Asia’s oldest stock exchange.
• Located in Mumbai, it is known for its iconic Sensex index, which tracks 30 major
companies.
• BSE provides trading in equity, debt instruments, derivatives, and mutual funds.
• It has played a historic role in shaping India’s capital market.
2. National Stock Exchange (NSE)
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• Established in 1992, NSE revolutionized trading by introducing electronic systems.
• Its benchmark index is Nifty 50, which tracks 50 leading companies.
• NSE is known for transparency, efficiency, and modern technology.
• It quickly became the largest exchange in terms of turnover.
3. Calcutta Stock Exchange (CSE)
• One of the oldest exchanges, established in 1908.
• Though smaller in scale today, it was once a major hub for eastern India’s trade.
4. Metropolitan Stock Exchange of India (MSEI)
• A newer exchange, recognized by SEBI.
• Provides trading in equities, derivatives, and currency futures.
5. Regional Stock Exchanges
• India once had many regional exchanges like Madras, Delhi, and Ahmedabad.
• Over time, most merged or shut down due to lack of volume and competition from
NSE and BSE.
Diagram for Better Understanding
Stock Exchanges in India
|
----------------------------
| | |
BSE NSE Others
| | |
Sensex Index Nifty 50 CSE, MSEI, Regional Exchanges
Importance of Stock Exchanges in India
1. Economic Growth: By channeling savings into investments, exchanges fuel industrial
and infrastructural development.
2. Investor Confidence: Transparent systems and SEBI regulations build trust.
3. Global Integration: Indian exchanges attract foreign investors, linking India to global
markets.
4. Wealth Creation: Individuals can grow their wealth by investing in listed companies.
Challenges Faced
• Volatility: Prices fluctuate rapidly, sometimes causing panic.
• Speculation: Excessive speculation can destabilize markets.
• Investor Awareness: Many small investors lack knowledge of risks.
• Technology Risks: Cybersecurity is a growing concern with electronic trading.
Conclusion
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A stock exchange is the backbone of India’s financial system. It provides a platform for
companies to raise funds and for investors to participate in economic growth. The Bombay
Stock Exchange (BSE) and National Stock Exchange (NSE) are the giants, while others like
CSE and MSEI add diversity.
SECTION-D
VII. Explain, how the lisng of securies is done in a stock exchange.
Ans: What does “listing” mean?
Imagine a company like a shop owner who wants more money to grow. Instead of
borrowing from a bank, the company decides to invite the public to invest in it by buying its
shares.
But there’s one condition:
These shares must be available in a trusted marketplace where people can easily buy
and sell them.
That marketplace is the stock exchange, and getting permission to trade shares there is
called “listing of securities.”
Why listing is important?
Before we go into the process, let’s quickly understand why listing matters:
• It gives credibility to the company
• It provides liquidity (people can easily buy/sell shares)
• It ensures transparency and regulation
• It helps investors trust the company
Step-by-Step Process of Listing Securities
Let’s walk through the journey of a company getting listed, step by step:
1. Decision to Raise Capital
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The process begins when a company decides:
“We need money to expand our business.”
So, it plans to issue shares to the public through an IPO (Initial Public Offering).
2. Appointment of Intermediaries
The company cannot do everything alone. It hires experts like:
• Merchant bankers
• Legal advisors
• Auditors
These professionals help in preparing documents and ensuring all rules are followed.
3. Preparation of Prospectus
The company prepares a prospectus—a detailed document that includes:
• Business details
• Financial statements
• Risks involved
• Purpose of raising funds
Think of this as the company introducing itself honestly to investors.
4. Approval from Regulatory Authority
In India, companies must get approval from SEBI (Securities and Exchange Board of India).
SEBI checks:
• Is the company giving true information?
• Are investors protected?
Only after SEBI approval can the company move ahead.
5. Application to Stock Exchange
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Now the company applies to one or more stock exchanges (like NSE or BSE) for listing.
The application includes:
• Company details
• Financial reports
• Shareholding pattern
• Compliance certificates
6. Fulfillment of Listing Requirements
Stock exchanges have strict conditions. The company must satisfy:
• Minimum capital requirements
• Minimum number of shareholders
• Corporate governance standards
• Disclosure norms
If the company fails here, listing is rejected.
7. Verification by Stock Exchange
The stock exchange carefully reviews the application:
• Checks documents
• Verifies compliance
• Ensures investor safety
This step is like a final inspection before approval.
8. Grant of Listing Permission
If everything is correct, the stock exchange grants approval.
Now the company is officially “listed.”
9. Trading Begins
Finally, shares of the company are available for public trading.
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• Investors can buy and sell shares
• Prices are determined by demand and supply
This is when the company truly enters the stock market world.
After Listing – Continuous Obligations
Listing is not the end—it’s just the beginning.
The company must continue to:
• Publish financial results regularly
• Inform about major decisions
• Follow corporate governance rules
If it fails, it can be delisted (removed from the exchange).
VIII. What is the security market index? Explian how it is constructed.
Ans: Introduction
When you hear people say, “The Sensex went up today” or “Nifty fell by 200 points”, they
are talking about a security market index. A security market index is like a thermometer for
the stock market—it measures the overall performance of a group of securities and tells us
whether the market is “hot” (rising) or “cold” (falling).
Meaning of Security Market Index
A security market index is a statistical measure that reflects changes in the market value of
a selected group of securities. These securities could be shares, bonds, or other financial
instruments.
In simple words:
• It is a benchmark that shows how a particular segment of the market is performing.
• It is constructed by selecting representative securities and calculating their combined
value in a systematic way.
Examples in India:
• Sensex (BSE) – tracks 30 major companies.
• Nifty 50 (NSE) – tracks 50 leading companies.
Purpose of Security Market Index
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1. Barometer of Market Performance
o Shows whether the overall market is rising or falling.
2. Benchmark for Investors
o Helps investors compare their portfolio returns with the market.
3. Indicator of Economic Health
o Rising indices often signal economic growth; falling indices may indicate
slowdown.
4. Basis for Derivatives
o Futures and options are often based on indices.
How a Security Market Index is Constructed
Constructing an index is not random—it follows a systematic process. Let’s break it down
step by step.
Step 1: Selection of Securities
• A representative sample of securities is chosen.
• For example, Sensex includes 30 large, financially sound companies from different
sectors.
• The idea is to capture the overall mood of the market.
Step 2: Assigning Weights
• Each security is given a weight based on its importance.
• Common methods:
o Price-weighted index: Higher-priced shares have more weight (e.g., Dow
Jones).
o Market capitalization-weighted index: Larger companies (with higher market
value) have more weight (e.g., Sensex, Nifty).
Step 3: Calculating Index Value
• The weighted average of selected securities is calculated.
• A base year is chosen, and the index value is expressed relative to that base.
• Formula (simplified):
Index Value =
Current Market Value of Selected Securities
Base Year Market Value
× 100
Step 4: Regular Review and Revision
• Indices are periodically reviewed.
• Companies may be added or removed to keep the index relevant.
Diagram for Better Understanding
Construction of Security Market Index
Easy2Siksha.com
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Selection Assigning Calculation
of Securities Weights of Index Value
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Periodic Review & Revision
Types of Security Market Indices
1. Broad Market Indices
o Cover large segments of the market.
o Example: Nifty 50, Sensex.
2. Sectoral Indices
o Focus on specific industries.
o Example: Nifty Bank, BSE IT.
3. Global Indices
o Track international markets.
o Example: Dow Jones, FTSE, Nikkei.
Importance of Indices
• For Investors: Helps in portfolio comparison.
• For Policymakers: Indicates economic trends.
• For Researchers: Provides data for analysis.
• For Traders: Basis for futures and options contracts.
Conclusion
A security market index is a statistical tool that measures the performance of a group of
securities, acting as a barometer for the entire market. Constructing an index involves
selecting representative securities, assigning weights, calculating values, and revising
periodically.
“This paper has been carefully prepared for educaonal purposes. If you noce any
mistakes or have suggesons, feel free to share your feedback.”
