Escolar Documentos
Profissional Documentos
Cultura Documentos
Financial Markets
What are Financial Markets?
In any economy, entities such as individuals, organizations and governments may have
surplus funds or may need funds for a variety of purposes. Thus funds need to be
exchanged between those who have surplus of them (called savers/investors/lenders) and
those who need them (called issuers/borrowers). Broadly speaking individuals are the
principal savers while organizations and governments are principal borrowers or fund
raisers.1 This transfer of funds takes place through a mechanism of financial markets.
1
The classification of individuals as investors and organizations and governments as fund raisers is only a
broad one. This is because individuals do borrow funds and organizations and governments do invest or lend
funds.
2
Capital is the amount of monetary resources required to run the business
As we have already seen, financial markets facilitate transfer of funds between the two
parties. This transfer takes place by issuing financial securities to the investors. The
advantage of these securities is that they are negotiable and thus can be traded. For
example, Organization A issues securities to Investor B. Obviously, investor B has given /
lent money to the organization A. Suppose investor B wants his money back after some
time, he can simply transfer the securities to any other investor, say Investor C by selling the
securities to him. This is what is meant by negotiable instrument and transfer of security
from B to C is called trading in securities.
All the participants have important roles to play. Their roles are described in detail in the
sections that follow.
Institutional Investors
These are the investors who exist as Corporations. As they are corporations, they pool
money from a variety of sources and invest through financial markets. Examples of these
include banks, mutual funds and insurance companies.
o Banks are depository institutions i.e. they collect deposits from individual investors
and business corporations. These deposits are lent to borrowers or invested in
financial securities of issuers.
o Managed Investment Companies collect money from individual investors, business
corporations and other institutional investors and in turn give them mutual fund
units which are again financial securities. On behalf of investors from whom money
has been collected, mutual fund managers / asset managers invest these funds
through financial markets in various securities.
o Insurance companies collect insurance premiums for a variety of purposes from
those who insure their lives or assets. These funds are in turn invested in various
financial instruments.
o An institutional investor has a pool of funds. This pool of funds can be invested in a
variety of assets.
o Since they collect a pool of funds from investors, the resources available to them are
huge compared to individual investors. Hence their investments are in large
amounts.
o They employ one or several investment managers who take investment decisions.
These investment managers are well trained, market professionals and hence these
Individual Investors
Individual investors are also called as ‘retail investors’. Retail investors participate in
financial markets either directly or indirectly. Direct participation means investors make
investment decisions on their own and invest money in various securities directly. Else, they
can park their funds with mutual funds who in turn invest in financial instruments. In this
case, investors do not participate in investment decision making process and thus participate
indirectly.. Retail investors are an important part of any financial market.
As against the institutional investors, retail investors have the following characteristics.
Retail investors have limited resources since they use their own funds to invest.
o If they participate directly, investment decision making may not be professional.
o Small sizes of investments.
o Since investment sizes are small, no preferential rates are offered by brokers to
execute the transactions.
3
Brokers actually execute transactions for investors. Detailed information about brokers in mentioned in the
section of “Infrastructure Providers”.
Mutual Fund
Investors
Professional Day
Investors Traders
Stock
Pickers
The different types of individuals are as follows:
Professional Investors: This refers to all those individuals who have substantial
investment resources so that they can acquire professional money management
services for their investment portfolio.
Stock Pickers: Stock Pickers are those individuals who are of the opinion that they can
choose individual stocks 5 for long-term investment on their own. They do their own
research and pick the stocks accordingly.
Mutual Fund Investors: A majority of the investors do not have adequate resources to
acquire individual professional money management services or adequate time or
penchant to invest on their own. It is these kind of individuals who normally select
Mutual Funds to invest in Securities.
Day Traders: Yet another category of individual investors is a day trader. A day
trader typically buys or sells securities during the day and does the reverse to close
positions by the end of the day. For example if a day trader purchases /(sells) a
4
Risk refers to the uncertainty of investment return
5
Stocks or equity shares are explained in the section on “Asset Classes”
Issuers
Issuers include government, government sponsored agencies and corporations that desire to
raise funds. They need to raise funds for a variety of purposes.
Issuers - Governments
Government requires funds for expenditures on infrastructure, health, education etc. as well
as to meet the shortfall in government revenue. Governments issue different forms of fixed
income securities6 to meet their needs. Government includes following categories:
o US Federal Government (or Central government of any country)
o US Government Agencies and Quasi-government Agencies – These are government
formed or sponsored agencies.
o State Governments
o Local Governments such as Counties and Municipalities
6
Fixed Income Securities are explained in detail in the section on Asset Classes.
7
A mortgage is a loan that is secured by the underlying real estate. For example when a loan is taken by a home
buyer, the house property is mortgaged with the lender.
8
Equity shares are explained in detail in the section on Asset Classes.
Banks
All of us as individuals and even business houses and governments consider banks as a safe
place to deposit money. A number of accounts can be opened with banks which have
different features and allow us to deposit money with them. They are financial
intermediaries because these deposits are in turn lent to those who need them or are used to
invest in financial instruments issued by issuers.
o Retail Banks: As the name suggests, these banks basically satisfy the needs of
retailers i.e. individuals. They offer services such as
Secured and Unsecured Loans: These loans are provided to the retailers for a
variety of purposes.
Checking and savings accounts
Purchase and sale of mutual funds and securities through specific purpose
subsidiaries
Electronic funds transfers
Bank investment products such as Certificates of Deposit
9
Underwriting Services mean whenever issuers issue securities underwriters ensure that any unsubscribed
portion is subscribed to by the underwriters. This ensures that the issuer raises the amount which is required by
him. For example, if issuer A wants to issue securities and raise $ 10 million. If the investors’ response is not
good, the issuer may not be able to raise the required amount. Underwriters ensure that he gets the full amount.
The function of underwriting is explained detail in Equity Module.
10
Custody function is explained in the next section on Custodian Banks
o Trust Banks : The custodial services mentioned above can be provided by the banks
directly or by forming trusts. Such banks are called Trust Banks. For example, an
institutional trust may be formed to take care of employee benefit programs such as
retirement plans for the employees that invest a certain amount regularly for the
benefit of the employees. The proceeds from such investments are payable to the
employees when they retire.
Broker / Dealers : Brokers are the intermediaries who provide broking services to
the investors. That means whenever the investors want to buy or sell securities they
do so through brokers. Brokers use the mechanisms established in the financial
markets to make sales or purchases for investors. Thus they act as agents for their
clients and charge a commission for services rendered. Unlike brokers who do
securities’ transactions for their clients, dealers act on their own accounts as
principals. That means they buy or sell securities for themselves. How do dealers
make money? They make money by buying the securities at a lower prices and
selling them at higher prices. The terms Brokers and Dealers are used together
because the same firms may act as brokers or dealers at different times. Hence these
terms are used together at many places throughout the text.
We saw earlier that investment managers are considered buy side of securities industry.
Brokers are considered sell side because they sell their research on securities and offer
broking services.
11
Explained in the section on Recent Developments
Managed Investment Companies : These are formed so that the investments can be
pooled together from a number of investors and invested in various securities.
Managed investment companies create a mutual fund and manage the same by
hiring professional portfolio managers. There are generally more than one mutual
funds created by these companies and each fund has different objectives. Thus it
becomes easier for investors to select the fund that meets their objectives.
Mutual funds help in create savings, are simple, accessible and also within an individuals’
reach. The major benefits of mutual funds are:
Diversification: It is said that it is better not to put all the eggs in one basket. This applies to
investments also. The successful investors are aware that diversification of their investment
helps in decreasing the adverse effect of a single investment. Mutual funds bring in
diversification to an investor’s investment portfolio automatically by holding a large variety
of securities. In addition, since the investor pools his assets with those of the other investors,
a mutual fund enables an investor to acquire a more diversified portfolio than one would
perhaps be in a position to comfortably manage on his own and also at a fraction of cost. In
brief, mutual funds give the opportunity to the investors to invest in many markets and
sectors / industries.
Low Costs: Mutual funds normally hold dozens or even hundreds of securities like stocks
and bonds. The basic method through which an investor pays for this service is through a
fee that is based on the total value of an individual’s account. Since the fund industry is
characterized by the possession of hundreds of competing firms and thousands of funds, the
exact level of fees changes. But, in the case of many investors, mutual funds provide
professional management and diversification at a fraction of the cost of making such kind of
investments independently by the investors on their own.
Liquidity: This refers to the ability to voluntarily access investor’s money in an investment.
Mutual fund shares are considered as liquid investments as they can be sold on any
business day. The price per share at which an investor can redeem shares is referred to as
the fund’s net asset value (NAV). NAV is the current market value of all the fund’s assets,
minus liabilities, divided by the total number of outstanding shares.
Protecting the Investors: The mutual funds are not only subjected to rigorous internal
standards, they are also highly regulated by the federal government through the US
Securities and Exchange Commission (SEC). As part of this government regulation, all the
funds are required to meet particular operating standards, should observe strict anti-fraud
rules, and reveal total information to existing and prospective investors. These laws are
stringently imposed and intended to protect investors from fraud and abuse. However,
these laws cannot help the investor in picking up a fund that is appropriate for the investor
12
Dividends are a part of profits that any company / investment institution pays out to the shareholders.
Types of Funds
Basically, there are three types of mutual funds based on asset class :
i. Stock or Equity: Stock mutual funds invest basically in shares of stock issued by
foreign companies or US.
ii. Bonds: These mutual funds invest mostly in bonds.
iii. Money Market: They invest basically in short-term securities issued by the US
government and its agencies, US corporations and state and local governments.
Stock Funds
These funds invest primarily in stocks. A share of stock fund signifies a unit of ownership in
a company. If a company is successful, then, the shareholders earn profits in the following
two ways:
The stock increases in value
The company can pass its profits to shareholders which take the form of dividends
Bond Funds
These funds invest basically in securities known as bonds. A bond is referred to as a type of
security that resembles a loan. Whenever a bond is purchased, money is lent to the
company, municipality or government agency that issued the bond. In exchange for use of
this money, the issuer promises to repay the amount loaned, in other words, the principal,
also known as the face value of the bond, on a specific maturity date. Apart from this, the
issuer characteristically assures to make periodic interest payments over the entire period of
the loan.
A point that needs to be remembered is that the operations of investment banks need to be
separated from each other by a Chinese wall. This is because there is chance of conflict of
interest between the operations of different departments of investment banks. For example,
a research analyst in research department should provide an independent opinion about
any company, whether that company is the client of an investment bank or not.
13
In simple terms treasury function involves managing short term cash surpluses and deficits.
Issuer
Issues securities to
Gets securities listed on stock exchanges I
N
V
E
Trading starts in securities S
after listing amongst various T
investors O
R
S
Thus the most important function of stock exchanges is that they provide trading a platform
for securities issued. Suppose Investor A has purchased a few securities issued by Issuer B.
The investor is in need of money and wants to sell the securities. This is greatly facilitated
by the stock exchanges since all the market participants who want to trade in particular
types of securities, do so through stock exchanges where the securities are listed. Without
stock exchanges, trading would have been difficult.
In most of the countries there may be a number of stock exchanges but a few usually
dominate in terms of volumes of securities traded. There may be National level stock
exchanges or regional stock exchanges. The stock exchanges operate under the supervision
The stock exchanges may require the members to assemble at a place to trade in shares
(called an open outcry system) or may allow trading through computer networks (called a
screen based trading).
Over-the-Counter Market
Unlike the stock exchanges, an Over-the-Counter (OTC) Market for stocks consists of
dealers who buy or sell stocks by negotiating through telephones and computer systems.
OTC market trading in US is done through network of computer systems called National
Association of Securities Dealers Automated Quotations (NASDAQ) System. It was put into
operation by the National Association of Securities Dealers (NASD). This nationwide
communication system allows brokers to know instantly the terms currently offered by all
major dealers in securities covered by the system. The dealers buy stocks for their own
account and sell them to investors at prices higher than their buying prices. A number of
companies are listed on NASDAQ.
14
Central counterparty function guarantees that the trade will take place without any default. For example if the
buyer of securities fails to make payment for his purchase, the seller is guaranteed money for the securities he
has sold through Central Counter party.
15
Money market instruments, corporate and municipal debt are explained in the section on Asset Classes
16
Netting of trades is done as a part of clearing process. For example, broker buys 300 units of Security A for
Client B during the day and sells 200 units of same security for Client C. In this case, the Clearing Corporation
will arrive at a net buy position (300-200) for this broker. Netting reduces the number of transactions.
17
Explained in the section “Recent developments”
Depository
Depending upon whether the depository settles international or national securities, there
are two types of depositories; International Central Securities Depository and Central
Securities Depository.
In Europe, a number of CSDs operate in different countries. These CSDs mostly are part of
either the Euroclear or Clearstream groups.
Custodian Banks
Though we have already mentioned about custodian banks in the section on banks, it is
appropriate to mention the role custodian banks or custodians play as settlement service
providers. This role comprises of customer account keeping and the administration of
securities on behalf of customers. In simple terms, customers open accounts (of securities,
just as accounts for money deposits are opened with banks) with custodians and custodians in
18
Eurobonds are fixed income instrument issued in the currency which is not the currency of the country where
the bonds are issued. For example, a US dollar denominated bond issued outside US is called a Eurodollar
bond.
Custodians not only maintain customer’s accounts wherein changes take place continuously,
but also provide a number of other services. For example, a company declares a dividend
which is to be paid to the shareholders. This dividend is collected and paid to the
shareholders by custodians. There can be two types of custodians; domestic or local
custodians and global custodians.
Transfer Agents
When a company issues new shares to investors, the function of actually issuing shares to
investors is done by transfer agents. Moreover, transfer agents also track the movement of
shareholding pattern20 because as we have seen when shares are sold by party A to party B,
the former no longer remains a shareholder. Hence shareholding pattern changes due to
19
Processing of trade means preparing for clearing and settlement of securities and actually settling the trades.
20
Shareholding pattern is a summary of list of shareholders and the number of shares each holder holds.
The National Futures Association (NFA) was established with the objective of protecting the
public investor by sustaining the reliability of the future’s market place. The board of
directors comprises elected representatives of each category of membership and by
representatives from US futures exchanges and non-futures Board members. Functions of
the NFA :
o Screens all firms and individuals who are desirous of conducting business with the
investing public
o Develops a vast range of investor protection rules and monitor all members for
compliance
o Provides investors with information required to make educated financial decisions
o Adopts fast and efficient methods for settling the disputes
The need for communicating financial messages across the globe amongst various financial
institutions is fulfilled by SWIFT. Thus SWIFT provides the services of financial data
communication and message processing.
SWIFT has dedicated telecommunication network which ensures that messages are
transferred rapidly, in a cost effective manner and securely.
Financial institutions operating in the areas of securities, payments, foreign exchange,
derivatives and money markets and trade finance use SWIFT messages for communication
24 hours a day.
SWIFT is owned by approximately 2300 banks, broker/dealers and investment6 managers
who use its services.
21
Privately negotiated derivatives means derivative contracts negotiated between two parties which are
popularly known as Over-the-counter Derivatives. Derivatives are explained in the slide on Asset Classes.
In the earlier sections, we have seen that issuers issue different types of securities. These
securities represent various alternatives available for investments to the investors. Types of
securities which have similar characteristics can be classified into a category called an asset
class. Thus an asset class is nothing but a specific category of assets or investments. The
assets within classes have similar features, are traded in similar market places and are
subject to the same laws and regulations.
Fixed
Income
Asset Currency
Equity
Classes
Commodities Derivatives
Equity
There are two major types of stocks known as common stock or equity and preferred stock.
Common Stock
Common stock represents ownership in a company and a claim (dividends) on a portion of
profits. Whenever we refer to equity shares, we are referring to common stock. Common
stock is also known as ordinary stock or shares. Equity shares are listed on stock exchanges
or trade over the counter. The trading in equity shares is very active in well developed
financial markets across the globe.
Equity represents ownership capital and being ownership capital, common stocks carry
risks and rewards of ownership. As far as rewards are concerned, the price appreciation is
considered to be the most promising one. A large number of shareholders hold equity
shares because they expect prices to go up. Other reward includes dividends which are paid
out of profits of the company. Apart from this shareholders have a right to vote and right to
information etc. However these rewards do bring along with them risks in terms of decrease
in price of shares or dividends not being paid since they are not mandatory. Moreover, if a
company goes bankrupt22 and liquidates, the common shareholders will not receive money
22
Bankruptcy in simple terms means the company is unable to meet its payment obligations, thus it may fail to
make payments for raw materials it has purchased or salaries or interest on loans etc. Such as company needs to
be liquidated i.e. its assets must be sold and liabilities (obligations) must be paid off from proceeds to assets
sold.
It has been observed historically that as an asset equities have provided larger returns
during the long-run compared to other asset classes. This higher return comes at greater
risks as mentioned above.
Preferred Stock
Preferred stock represents some degree of ownership in a company but usually it does not
come with the same voting rights. Preferred stock or preference shares have a combination
of features of equity and debt. Normally, the holders of preference shares are entitled a fixed
dividend. This is different than common stock, which has variable dividends that are never
guaranteed. Preferred shareholders are paid off before the common shareholders in case of
liquidation of the company. As for the risk-return profile of preference shares is concerned,
it lies between the fixed income securities and equity.
Fixed income securities are securities which promise to pay a fixed amount as a return to the
investors. Unlike equities, where dividends or capital appreciation can hardly be
determined when the investment is made, in case of fixed income securities the interest
payments (called coupon payments) and principal payments are determinable at the time of
investments. From the issuer’s perspective, these instruments represent a kind of loan or
borrowing that the issuer has done. Hence these securities are also called debt securities.
The issuers of fixed income securities involve the governments and corporate. For example,
US government and US corporations issue these fixed income products which have varying
maturities. These securities are marketable and provide liquidity to the users. Treasury
securities (fixed income securities issued by the governments) form major chunk of fixed
income securities which are in the form of treasury bills, treasury notes, and treasury bonds.
Corporate debt instruments are issued by various corporations to meet their current and
future cash requirements. They are listed and traded on various stock exchanges. However
trading in corporate debt (bonds), is not as active as that of equity shares.
Currencies
Currency market refers to market for foreign currencies. All entities may require foreign
exchange for variety of purposes. For example, individuals need them for funding their
education, travel plans, investments etc. Corporations require foreign currency for meeting
their payment obligations in foreign currency, making investments in foreign country or for
trading purposes.
Foreign exchange market is, by most accounts, the oldest, largest, and most extensive
financial market in the world. According to a triennial survey of foreign exchange markets,
the Bank for International Settlements (BIS) estimated average daily turnover in the global
foreign exchange market to be $1.9 Trillion in April 2004. Currently, the daily turnover in
the global forex market is close to $3.0 trillion.
Dollar, Euro, Pound Sterling and Yen are the four most popular currencies that are traded.
Although participants in the foreign exchange market are increasingly scattered around the
globe, most transactions still take place in London, New York, Tokyo, Singapore, Hong
Kong and Switzerland.
Foreign Exchange market consists of spot, forward and derivative products23. Spot
transaction involves exchange of two currencies for settlement as soon as practicable,
23
Explained in next section
Commodities
Commodities have existed as oldest asset class. As a simple investment strategy, traders
would hold the stocks of a commodity if they felt price of that commodity would go up. The
organized trading in commodities emerged ever since the evolution of Chicago Board of
Trade, an exchange for trading in commodities set up in the year 1848. A number of
exchanges all over the world provide trading in commodities.
As an example, following commodities are traded on the Chicago Board of Trade, which is
one of the oldest commodity exchanges. Agricultural Products: Soybeans, Wheat, Rice,
Corn, Soybean Oil, Soybean meals, Oats, Precious Metals: Gold, Silver. The other
Derivatives
Derivatives are financial instruments which derive their value from the value of the
underlying asset. The underlying asset can be equity, fixed income instruments, interest
rates, foreign exchange or commodities. The price movements of derivative products are
related to that of the underlying securities.
Types of Derivatives
o Forward Contracts – A forward contract is a contract between the two parties
which allows them to exchange the underlying asset at some future date at a
price decided today. For example, a buyer may enter into a contract with a seller
to buy shares of company ABC at $ 50 after one month. Thus the actual exchange
takes place after a month but the price is decided today. This removes the
uncertainty for both the buyers and the sellers.
o Futures Contracts – A futures contract is similar to forward contracts except that
futures contracts are traded on a futures exchange. Thus in case of futures
contracts, buyers and sellers execute the same through futures exchange and not
amongst themselves as it happen in case of forward contracts. Because
transactions are done through a futures exchange, the terms of futures contract
are standardized.
o Options Contracts – Suppose in an example given earlier, a buyer and a seller
decide to exchange shares of ABC at $ 50 after one month, but the buyer reserves
the right to sell the shares to B, then this contract is called an options contract.
This means the buyer has the right but not the obligation to sell (in this case) or
to buy the underlying asset. He gets this privilege if he pays some amount when
Types of Risks
Market participants deal in various asset classes. This exposes them to different types of
risks. Broadly the risks are as follows.
Primary market enables the issuers to raise the capital required from investors. Thus it has a
major role in bringing the investors and issuers together. A vibrant primary market ensures
that a number of corporates issue securities which in turn provides a range of investment
opportunities for the investors. This leads to an increase in market size, attracting more
investors.
The money market instruments, their maturities, principal borrowers and the nature of
secondary market in US are described in the following table.
24
Maturity of instruments mean the time period after which the securities no longer exist. For equities there is
no maturity period. For fixed income instruments, there is a maturity period attached to each instrument. For
example, US Federal Government issues securities with maturities less than an year (called treasury bills),
between two to ten years (called treasury notes) and more than ten years (called treasury bonds).
Source: US Monetary Policy and Financial Markets, US Federal Reserve Bank of New York p. 81
Equity Markets
In equity markets equity related instruments are traded. These are as follows.
Corporate Bonds
o Corporate bonds are similar to the other kinds of fixed income securities in that
they promise to make specified payments at specified dates and provide legal
remedies in the event of default. Restrictions are often placed on the activities
of issuing corporations to provide protection to the bondholders.
Regulators play an extremely important role in smooth conduct of the securities industry.
Every country has one or many regulators which are responsible for regulation, supervision
and conduct of securities industry in those countries. Some of the countries and regulators
are as follows.
Country Regulator
Australia Australian Securities & Investments Commission
Belgium Banking, Finance and Insurance Commission
China China Securities Regulatory Commission
France Autorité des marchés financiers
Germany Bundesanstalt für Finanzdienstleistungsaufsicht
Hong Kong Securities & Futures Commission
India Securities & Exchange Board of India
Japan Financial Services Agency
South Korea Financial Supervisory Commission / Financial Supervisory Service
United Kingdom Financial Services Authority
United States Securities & Exchange Commission
The mission of the U.S. Securities and Exchange Commission is to protect investors,
maintain fair, orderly, and efficient markets, and facilitate capital formation.
Investing in bonds, equities, and other securities involve the risk of loss in value. Unlike the
banking world where in federal depository insurance cover provides some guarantee to the
depositors, in the securities market such guarantee is not available. Hence investors need to
be careful in investing and government needs to protect the interests of investors by making
appropriate laws.
The laws and rules that govern the securities industry in the United States derive from a
simple and straightforward concept: all investors, whether large institutions or private
individuals, should have access to certain basic facts about an investment prior to buying it,
and so long as they hold it. In order to achieve this, the Securities Exchange Commission
(SEC) requires the public companies to disclose meaningful financial and other information
to the public. This provides a common pool of knowledge for all investors to use to judge
for themselves whether to buy, sell, or hold a particular security. Only through the steady
flow of timely, comprehensive, and accurate information can investors make sound
investment decisions.
The result of this information flow is a far more active, efficient, and transparent capital
market which facilitates the capital formation, that is so important to the nation's economy.
To ensure that this objective is always being met, the SEC continually works with all major
market participants, including the investors in the securities markets, to listen to their
concerns and to learn from their experience.
Crucial to the SEC's effectiveness in each of these areas is its enforcement authority. Each
year the SEC brings hundreds of civil enforcement actions against individuals and
companies for violation of the securities laws. Typical infractions include insider trading,
accounting fraud, and providing false or misleading information about securities and the
companies that issue them.
One of the major sources of information on which the SEC relies to bring enforcement action
is investors themselves -- another reason as to why educated and careful investors are so
critical to the functioning of efficient markets. To help support investor education, the SEC
offers the public a wealth of educational information on this Internet website, which also
includes the EDGAR database of disclosure documents that public companies are required
to file with the Commission25.
The Commissioners
The Securities and Exchange Commission has five Commissioners who are appointed by the
President of the United States with the advice and consent of the Senate. Their terms last
25
In the US, all companies, foreign and domestic, are required to file registration statements, periodic reports,
and other forms electronically through EDGAR.
Corporate Reporting - Following the registration of stocks with the SEC for public offer by
the companies, corporations must file annual reports and disclose periodic updates on the
functioning of the corporation. Issuers must send the certain reports to the shareholders and
all the information about the corporation is to be electronically filed with SEC website.
Insider Trading - Insider trading refers to the misuse of confidential information about the
company that is not available to the general public. This is in the form of:
buying or selling shares to make profits or avoid losses based on material non-public
information
informing non-public information to others so that they may buy or sell securities
before such information is available to the public.
The SEC has brought numerous civil actions to such practices and Section 16 of the
Exchange Act requires that such information be furnished to the SEC.
Margin Trading – Market participants may purchase securities using borrowed money.
This is referred to margin trading. This borrowing is subject to the limitations prescribed by
the SEC. The objective of margin trading rules is to prevent excessive use of credit for
purchase or carrying of securities. The Board of Governors of the Federal Reserve System is
authorized to set these limits.
These entities must show that they are organized and comply with the provisions of the
statue as well as rules and regulations of the SEC.
Financial Services Modernization Act 1999 removed the barriers for banks, brokers and
insurance companies to merge and cross sell their products.
Sarbanes-Oxley Act (SOX) of 2002 defines the rules and procedures for corporate
accountability with respect to financial statements and disclosures with the objective: “to
protect investors by improving the accuracy and reliability of corporate disclosures made
pursuant to the securities laws.” The law makes violations of these rules the same as a
violation of the 1934 Act, and imposes the same penalties.
The SOX Act requires chief executive officers and chief financial officers to individually
confirm their company’s financial statements. Corporate audit committees are particularly
responsible for hiring, compensating and supervising the independent auditors and there
are new requirements with respect to the improved financial disclosures.
SOX is applicable to all publicly traded firms listed on any US-based financial exchange, not
considering their domicile. The Act stipulates the annual report of a publicly traded firm to
consist an internal report that:
Identifies the individual who is responsible to establish and maintain the internal
control structure and procedures for financial reporting
Criminal penalties for records destruction, securities fraud and failure to report
fraud
A CFO or CEO who knowingly certifies non-complying financials shall be fined up
to $1 million and imprisoned for 10 years
Failure to maintain all audits or review papers for at least five years may result in jail
terms of ten years.
Jail term may go up to 20 years for destroying documents in federal or bankruptcy
investigation while penalty for securities fraud is 25 years
The FSA is the single statutory regulator responsible for the authorization and regulation of:
Deposit taking (by banks)
Insurance
Investment Business
Mortgage advice
General Insurance advice
Regulatory Approach
The FSA has been the single regulator for financial services in the UK since December 2001,
when the Financial Services and Markets Act 2000 (FSMA) came into force. Since then , it
has had a single Handbook of rules and guidance for all authorized financial firms carrying
out business in the UK. The Government has increased the scope of the activities it regulates
In January 2000 FSA set out the proposed approach to regulation in a New Regulator for the
New Millennium. The regulator stated that its overriding aim was "to maintain efficient,
orderly and clean financial markets and help retail consumers achieve a fair deal". Its
approach is based on a clear statement of the realistic aims and limits of regulation; it
recognizes the proper responsibilities of consumers and of firms' own management, as well
as the impossibility and undesirability of removing all risk and failure from the financial
system.
Progress
The regulator issued three progress reports describing its continuing work in developing
this operating framework. This includes a paper 'The Firm Risk Assessment Framework',
which it published in February 2003, setting out what firms need to know about how risk
assessment works and what it means for them. It now has over two years of working within
its operating framework. Although this has proved to be a key tool for the regulator in
discharging its regulatory duties, as might be expected FSA found it necessary to consider
further refinements to it and to its overall approach towards risk.
FSA’s Handbook presents the standards expected from regulated firms and is a key vehicle
for communicating those standards to the outside world. So it should reflect vision and
values of the Authority. These include an approach to rule-making based as far as possible
on high-level principles, rather than detailed prescription; a focus on senior management
responsibility; and acting in a proportionate and risk-based way.
Electronic Trading
This refers to the trading platform that makes use of global distribution network. For
example, NASDAQ uses a sophisticated computer and telecommunications network, which
transmits real-time quotes and trade data to more than 2 million users in 83 countries. It is
capable of trading all 6700 US securities listed on NYSE, AMEX and NASDAQ on
geographically diverse and resilient network. Electronic trading makes an exchange no
longer be tied to a place.
London International Financial Futures and Options Exchange (LIFFE) is the world’s
leading electronic derivatives exchange. This was established in the year 1982 deals with the
exchange traded derivatives. It offers wide range of derivative products. LIFFE CONNECT
is the most advanced electronic trading platform which provides an opportunity to the
26
Immobilization means placement of physical certificates in central securities depository so that the movement
of such securities is reduced and done through a book entry transfer only.
Web Trading
Web trading refers to trading of shares by the buyers and sellers using Internet services.
Along with the online broker transactions web trading includes financial transaction
processing. In other words, it supports traditional internet and the brokerage transaction
process network.
Financial Messaging
The dynamic nature of financial markets and institutions requires exchanging information with
clients and counterparties efficiently. Financial Messaging involves combining all the financial
service functions including buy sell orders, funds transfers, trade settlement instructions, and
credit card information. It involves infrastructure for a unified standard that encompasses all
phases of a trade or transaction lifecycle. For example, SWIFT (Society for Worldwide Inter-
bank Financial Telecommunication) is a co-operative organisation created and owned by
banks that operate a network facilitating the exchange of payments and other financial
messages between financial institutions throughout the world. It is used extensively for
transmitting post-trade processing messages.
Market Data Definition Language (MDDL) is an XML based interchange format and
common data dictionary that allows entities to exchange market data by standardizing
formats and definitions.
In simple words, MDDL ensures that
a common format is provided for market data
in order to efficiently pass this data from one processing system to another
thus MDDL provides a common understanding of market data content as terminology is
standardized
MDDL provides a generic format on the fields needed to describe Financial instruments,
Corporate Events, Market Related Information.
In order to achieve this objective, Straight Through Processing (STP) helps, which provides
seamless connectivity for the entire trade processing without manual intervention.
GLOSSARY
Asset Class: An asset class is nothing but a specific category of assets or investments. The
assets within classes have similar features, are traded in similar market places and are subject
to the same laws and regulations.
Bankruptcy: Bankruptcy means the company is unable to meet its payment obligations,
thus it may fail to make payments for raw materials it has purchased or salaries or interest
on loans etc. Such a company needs to be liquidated i.e. its assets must be sold and liabilities
(obligations) must be paid off from proceeds to assets sold.
Capital market: Markets dealing with instruments having maturities exceeding one-year are
often referred to as capital markets.
Central counterparty function: It guarantees that the trade will take place without any
default. For example if the buyer of securities fails to make payment for his purchase, the
seller is guaranteed money for the securities he has sold through Central Counter party.
Common Stock: Common stock represents ownership in a company and a claim (dividends)
on a portion of profits.
Convertible Bonds – These instruments, when issued, are fixed income securities to be
converted into equity shares after some time.
Corporate bonds are similar to the other kinds of fixed income securities in that they
promise to make specified payments at specified dates and provide legal remedies in the
event of default.
Custodian Banks: The securities in which they invest need to be kept safely and
administered in the sense the record of buying and selling and the stock of securities need to
be updated on a continuous basis. This service is called custody service which is provided
by Custodian banks.
Day Trader: A day trader typically buys or sells securities during the day
and does the reverse to close positions by the end of the day.
Demand Deposits: These accounts do not earn any interest for keeping deposits but the
deposit holder can withdraw deposit any time he wants.
Derivatives: Derivatives are financial instruments which derive their value from the value of
the underlying asset.
Dividends are a part of profits that any company / investment institution pays out to the
shareholders.
Equity Index: By equity index means a weighted average price for a group of securities,
which make that index.
Equity Warrants: Warrants entitle the warrant holders to subscribe to equity shares at a
particular price sometime in the future.
Financial Markets: Financial markets facilitate the transfer of surplus funds from the
(savers/investors/lenders) to those who are in need of funds (issuers/borrowers).
Financial Messaging involves combining all the financial service functions including buy
sell orders, funds transfers, trade settlement instructions, and credit card information.
Financial Securities: Financial securities are issued by those who need capital and represent
the fact that such issuers have raised funds from investors.
Financial Services Authority: It is an independent body that regulates the financial services
industry in the UK.
Fixed Income Securities: Fixed income securities are securities which promise to pay a
fixed amount as a return to the investors.
Forward Contract: A forward contract is a contract between the two parties which allows
them to exchange the underlying asset at some future date at a price decided today.
Full Service Firms: These broking firms offer a full range of services. They have large
research departments which offer client advice and research on securities.
Individual Investors: Investors who make investment decisions on their own and invest
money in various securities directly.
Investment Managers: The investment managers or asset managers actually take the
decisions to deploy collective investment funds in various investment products / securities.
Managed Investment Companies: They collect money from individual investors, business
corporations and other institutional investors and, in turn, give them mutual fund units, which
are financial securities.
Margin Trading: Market participants may purchase securities using borrowed money. This
is referred to margin trading.
Money Market: The market is one where in securities with shorter maturities are traded and
issued is referred to as money markets.
Mutual Fund: A mutual fund is a fund collected by Managed Investment Companies that is
invested in a diversified portfolio of securities.
Net Asset Value: The price per share at which an investor can redeem shares is referred to as
the fund’s net asset value. It is the current market value of all the fund’s assets, minus
liabilities, divided by the total number of outstanding shares.
Netting of Trade: Netting of trades is done as a part of clearing process. For example,
broker buys 300 units of Security A for Client B during the day and sells 200 units of same
security for Client C. In this case, the Clearing Corporation will arrive at a net buy position
(300-200) for this broker. Netting reduces the number of transactions.
Over-the-counter (OTC) market It is a market for stocks consists of dealers who buy or
sell stocks by negotiating through telephones and computer systems.
Preferred stock: Preferred stock represents some degree of ownership in a company but
usually it does not come with the same voting rights. They have a combination of features of
equity and debt.
Price Discovery: “Price discovery” means that when securities are continuously transferred
between various investors, it helps arrive at the correct price at which the security should
trade.
Processing of trade: It means preparing for clearing and settlement of securities and
actually settling the trades.
Rolling Settlement: The settlement takes place a given number of business days after the
date of the trade. For example, if rolling settlement is T + 3, all the trades, no matter whether
they are done on any of the week days, will be settled in three business days subsequent to
the trading day.
Savings accounts – These accounts pay a low rate of interest. These accounts are generally
very popular amongst individuals who park their surplus funds and withdraw whenever
they want subject to certain restrictions.
Secondary Market: Secondary market for financial securities, is a market where outstanding
securities i.e. securities which have already been issued by the issuer are traded.
Secured Lending: Secured lending means that the loan given is secured against any asset
that borrower has.
Shareholding pattern: It is a summary of list of shareholders and the number of shares each
holder owns.
Stock Pickers: Stock Pickers are those individuals who are of the opinion
that they can choose individual stocks for long-term investment on their
own. They do their own research and pick the stocks accordingly.
US Treasury bonds are another form of fixed income instruments with maturities greater
than 10 years at the time of issuance
Unsecured lending – These types of lending are not secured against any asset. Hence in the
event of default i.e. corporate not paying back the loan, the bank can not take charge of any
asset and recover its dues.
Web Trading: Web trading refers to trading of shares by the buyers and sellers using
Internet services.
2. A large number of buyers and sellers trade in the securities at different prices in financial
markets. Hence we can say that trading by large number of buyers and sellers helps in
a financial disintermediation
b discovery of price for the securities
c generation of profits for the issuer
d none of the above
3. When an underwriting service for an issue of securities is carried out by a bank, it means
that
a. Bank markets the issue to other investors
b. Bank guarantees subscription to unsubscribed portion of the issue
c. Bank decides the price at which the securities are to be offered to
investors
d. Bank helps in preparing prospectus for the issue
5. A corporation wants to raise capital for financing its project by issuing shares to
investors. If the corporation raises funds by issuing shares this will lead to ---------
7. Mr X is an individual investor. He visits the stock exchange daily and sits in retail dealing
room of his broker. He buys and sells securities very frequently for a very short period of
time. He is likely to be called ------
a A professional investor
b A stock picker
c A mutual fund investor
d A day trader
9. US Federal Government needs funds for two years. Hence it should issue ---------------
a equity shares
10. Federal Home Loan Mortgage Corporation and Federal National Mortgage Association
issue --------------------
a municipal debt
b fixed income securities
c bankers’ acceptances
d mortgages
12. Which of the following does not compete with bank deposits in generating funds from
investors?
a Mutual funds
b Equity shares
c Corporate fixed income securities
d None of the above
13. As far as the fixed income security market is concerned, secondary market is
one
a. where new fixed income securities are issued
b. market in which only corporations can issue new fixed income securities
c. where existing fixed income securities are traded
15. For its employee retirement plan, ABC Corporation will set some amount
aside each year to be invested in various securities. The management of such
funds will be done by forming a separate legal entity in the form of -------
a an investment bank
b a depository
c an institutional trust
d a subsidiary company
17. S & S Financial Services offers investment advice to its investors. It executes deals on
behalf of its clients. The firm can be called
a A broker
b A dealer
c Both a & b above
d A portfolio manager
20. The organization in the US that is responsible for setting up and implementing security
markets related policies and regulating the same, is:
a. Federal Open Market Committee
b. Federal Reserve System
c. Securities Exchange Commission
d. Exchange Commission
21. An institution offers advice to corporates on valuing companies so that some of them can
be taken over / acquired by the companies seeking the advice. This institution is likely to be
----
a An investment bank
b A trust bank
c A Broker / dealer
d Managed investment company
29. Government securities and Mortgaged Backed securities are cleared in US by -------
a National Securities Clearing Corporation
b Options Clearing Corporation
c National Association of Securities Dealers
d None of the above
30. Which of the following offer clearing services?
a International Central Securities Depositories
32. A firm keeps the record of shareholders of various companies and tracks the changes in
shareholding patterns of various companies. This firm is likely to be ----
a An investment bank
b A custodian
c A transfer agent
d A broker/dealer
d. Depositories allow trading in shares through them as they are the members of
stock exchanges
37. ABC Corporation declares a divided of 20% of its net income. This dividend is collected
from the company and paid to the shareholders by ----
a. A commercial bank
b. A custodian bank
c. A trust bank
d. A clearing service provider
38. A transfer of securities in the electronic form is done by book entry. This transfer is done
by ----
a. Depository
b. Buying and selling brokers
c. Custodian banks
d. NASD
44. Which of the following type of a mutual fund is expected to be least volatile in terms of
returns provided to investors?
a. Equity fund
b. Bond fund
c. Derivatives fund
d. Money market mutual fund
46. Identify from the following which entity is not an Issuer of debt in the US
a States
b U S Federal Government
c Municipalities
d None of the above
48. Country A has a well developed banking system. Hence residents of this country put
their savings mostly in banks which are considered safe. For risk loving investors, no risky
investment opportunities are available. Similarly, for those who want to invest for long
term, hardly any investment products are available. This can be a description of ------
a. a well developed financial market
b. an underdeveloped fixed income securities market
c. an underdeveloped equity market
d. Both b & c above
49. Which of the following can not be the issuer of equity shares?
a. Stock exchange
b. Local government
c. Commercial Bank
d. Both a & b above
50. Equity capital provides a ________ claim on assets of the issuer to the investor
a total
b residual
c preferential
d None of the above
53. Spot transaction involves exchange of two currencies for settlement as soon as
practicable, typically in __________working days
a Three
b One
c Two
d Five
54. Identify from the following which is not a function of a custodian bank?
a. Keeping track of income collection
b. Safe keeping of securities
c. Trading on behalf of customers
d. Providing settlement service to customers
56. If financial markets are classified on the basis of issue and trading of securities, we can
classify them as ----------
a Money and capital markets
b Spot and forward markets
c Primary and Secondary markets
d Equity and Fixed Income markets
60. Mr X has invested in securities issued by a company. He is entitled for a fixed dividend.
However he has not received the dividend for the last two years. He must be holding ----
a. Common stock
b. Preferred stock
c. Convertible bond
d. None of the above
61. Mr X, Mr Y and Mr Z have invested is common stock, preferred stock and fixed income
securities respectively issued by the same issuer. In terms of level of risks assumed by them,
we can say that -----
a. All of them have the same level of risk since the issuer is same
62. Mr X, Mr Y and Mr Z have invested is common stock, preferred stock and fixed income
securities respectively issued by the same issuer. In terms of returns expected by them, we
can say that --
a. All of them have the same level of return expectations since the issuer is
same
b. Mr X has lowest level of return expectations amongst them
c. Mr Z has lowest level of return expectations amongst them
d. Mr Y has highest level of return expectations amongst them
63. Mr X, Mr Y and Mr Z have invested is common stock, preferred stock and fixed income
securities respectively issued by the same issuer. Unfortunately the company in which they
have invested in is being wound up. The proceeds from the sale of company’s assets will be
distributed to them in the following priority.
a 1st – Mr X, 2nd – Mr Y, 3rd – Mr Z
b 1st – Mr Z, 2nd – Mr Y, 3rd – Mr X
c 1st – Mr Y, 2nd – Mr Z, 3rd – Mr X
d All of them will have same priority
64. Mr X, Mr Y and Mr Z have invested is common stock, preferred stock and fixed income
securities respectively issued by the same issuer. This year the issuing company’s
performance has been very good and earnings have doubled compared to the last year. Who
will derive the maximum benefit of company’s good performance?
a Mr X
b Mr Y
c Mr Z
d All of them equally
67. Under T+3 Settlements for trades done on Wednesday settlements have to be completed
by_______________, assuming there are no holidays in between
a Monday
b Thursday
c Saturday
d Friday
69. A person who invests his own capital and also trades on behalf of a client is known as
a. Broker
b. Broker/Dealer
70. These broking firms charge lower commissions and execute deals for the clients and do
not provide investment advice : -------------------
a full service firm
b discount firm
c online firms
d None of the above
72. Identify from the following which is not a function of a transfer agent
a Issuing and canceling certificates to reflect changes in ownership
b Acting as an intermediary for the company
c Handling lost, destroyed or stolen certificates
d Handling safe custody of securities
74. National Securities Clearing Corporation settles and clears trades on ___________basis
a T+2
77. _______________play a major role in issuance and underwriting of new securities in the
primary market
a Trust banks
b Commercial banks
c Investment banks
d Retail banks
79. Identify from the following which is not an investment option for a bond fund
80. An investment manager who manages a money market mutual fund is exploring
possibilities to invest in a number of securities as given below. Identify a security in which
he can not invest as a money market mutual fund manager.
a. A commercial paper issued by ABC Corporation
b. US Treasury Bills
c. A fixed income security issued by ABC Corporation with a maturity of
two years
d. A municipal note maturing in 270 days
81. Which of the following is expected to be least volatile in terms of returns earned?
____________
a. Bond fund
b. Money market mutual fund
c. Equity fund
d. Derivatives fund
82. The average maturity of an instrument in a money market fund is lower than
a. 270 days
b. One year
c. Three years
d. Ten years
89. Mr X subscribes to a fixed income security issued by ABC Corporation. The issuer
also allots him another instrument which entitles him to apply for one equity share per
instrument at a particular price. This instrument is likely to be -----
a a debenture
b a right equity share
c an equity warrant
d a put option on equity
92. PQR Corporation is not a regular customer of ABC Inc. The former approaches ABC Inc.
for purchase of machinery costing $ 1,000,000 and asks for a credit period of four months. To
finance this and to get a security against the payment by PQR, ABC Inc -----
a can issue commercial paper
b can draw a bill on PQR and get it accepted from a bank
c can go for a working capital loan from a bank
d None of the above
93. A bank wants to subscribe to a 13 week treasury bill issued by US Federal government
through primary market . It can do so every ----- .
a day
b week
c fortnight
d month
94. Which of the following need not be registered with Securities and Exchange
Commission?
a Broker / dealers
b Transfer agents
c Clearing agencies
d None of the above
96. DTCC is a central securities depository of US. Physical certificates are placed with it so
that the movement of such securities is reduced. This is called --------
a immobilization of securities
b freezing of securities
c blocking of securities
d none of the above
97. Mr X is working as an equity analyst with a managed investment company which runs
five mutual fund schemes. He is approached by Mr Y who is an analyst with a broking firm
advising him to sell certain stocks. In this case, Mr X can be referred to as ------.
a sell side analyst
b buy side analyst
c fund manager
d portfolio tracker
103. ABC Corporation came out with an IPO of $5.5 million. The issue price was kept in the
range of $ 20 to $ 25. However, the issue did not receive a good response and was
undersubscribed. This resulted in cancelling the issue. We can conclude from this -----
a. the investment banks that were engaged in underwriting the issue, did
not do proper marketing of the issue
b. there were a number of IPOs planned at the same time
104. The state government of California may participate in the US securities industry as ---
a. intermediary
b. settlement service provider
c. regulator
d. issuer
105. Mr X has been tracking the stock market for last 10 years. He tracks the movement of
stocks very regularly and selects the stocks for investment doing his own research.
According to him, his average holding period of any stock is 2 to 3 years. He can be
described as -----
a a day trader
b a professional investor
c a stock picker
d none of the above
106. Mr Y does not believe on the ability of mutual fund managers to provide a very good
return on investments. Hence he has employed two independent investment managers who
conduct in-depth research, track daily movements in prices of securities and manage his
funds. Mr Y is a -----
a. a professional investor
b. a stock picker
c. a fund manager
d. a day trader
107. A security issued two years back by US Federal government is maturing in 26 weeks.
This security must be a -----
108. An investor wants to invest in equity shares. He wants to invest in equity shares
directly, not through mutual funds. Which of the following arguments, that he makes, do
you agree with?
a. I want to invest directly since Managed Investment Companies hire
professional investment managers who demand fat salaries, making
mutual funds a costly proposition.
b. I can invest in whichever stocks I select and hence can achieve a better
diversification.
c. Since the mutual funds do not reveal important information, it is difficult
to make a choice between various funds
d. None of the above
109. Mr A is arguing with Mr B regarding risk return profile of various investments. He has
drawn the risk return profile as follows.
Equity Fixed Income Securities Preferred Stock
Moderate Risk Low Risk Highest Risk
Do you agree with Mr A? Why or why not?
a. Yes I agree with him, since fixed income securities have a priority of
claims over equity and preferred stock, while equity has priority over
preferred stock
b. No, I do not agree with him. Fixed income securities carry highest risk
because they are not listed and hence it is difficult to trade them
c. No, I do not agree with him. Preferred stock carries lowest risk since it
has both the features of fixed income securities & equity. Fixed income
securities rank next, followed by equity which carries highest risk.
110. Smart Financial Services operates in fixed income markets. It provides a continuous
buy sell quotes to its customers and transacts on its own account. The firm is –--------
a. a broker
b. an investment bank
c. a dealer
d. a fixed income securities issuer
112. Mr A is a senior employee in the accounts department of a company who finalizes the
accounts. The company announces the results of its operations on April 10th . It has
performed poorly in the recent quarter. Mr A sells shares of the company on April 11th .
Which of the following is correct?
a. Mr A has violated insider trading rules
b. Mr A has not violated insider trading rules
c. Mr A has acted on non-public information
d. Mr A has violated Sarbanes – Oxley Act
114. On April 5th , clients of broker A have bought 500 shares of ABC Corporation while
clients of broker B have sold 700 shares of ABC Corporation. Going through these records,
the stock exchange instructs broker B to give a delivery of 200 shares. This process is called -
--------
a. trade matching
b. netting
c. trade settlement
d. trade allocation
115. Mr X has purchased a financial instrument. The value of that instrument varies with
equity shares of a company. This instrument is likely to be ------
a an equity warrant on company’s shares
b a derivative instrument on company’s share
c a fixed income security issued by the same issuer
d both a & b above
117. Mr X has sold a fixed income security to Mr Y. Mr X has the securities ready to be
delivered. Till Mr Y pays, we can say that Mr X is taking -----
a a price risk
b a market risk
c a liquidity risk
d a credit risk
118. Which of the following type of risks is not a part of market risk?
a Foreign exchange risk
b Interest rate risk
c Counterparty risk
d Price risk
119. Mr A purchased certain fixed income securities three years back. He needs to sell these
securities since he wants funding for his new car. However, these fixed income securities
are not traded frequently and hence Mr A is finding it difficult to sell. He is facing a ------
a price risk
b market risk
c liquidity risk
d counterparty risk
120. Mr X and Mr Y have invested in fixed income securities and equity shares respectively.
Changes in interest rates in the country will affect -------
a returns for Mr Y more than that of Mr X
b returns for Mr X more than that of Mr Y
c only returns of Mr Y
121. In the US, the regulations about reporting by corporates are laid down by ------
a The US Federal government
b Respective stock exchanges where the shares are traded
c Financial Services Authority
d Securities & Exchange Commission
122. As per Sarbanes – Oxley Act, ------- are responsible for hiring, compensating and
supervising independent auditors.
a Chief Executive Officers
b Chief Financial Officers
c Both a & b above
d Corporate audit committee
124. East West Bank is a bank in UK which offers various types of deposits to investors. The
bank must be regulated by ----
a Securities & Exchange Commission of UK
b Financial Services Authority
c London Stock Exchange
d The Government of UK
125. An industry standard electronic protocol for pre trade communications used by
institutions and ECNs is ------
126. A portfolio of mutual fund is given below. Identify which type of mutual fund it is
likely to be ?
Issuer Security
US Federal Government 26 Week Treasury Bill
ABC Corporation Commercial Paper
PQR Industries Bankers’ Acceptance
XYZ Bank Certificates of deposits
a Bond fund
b Equity fund
c Money market fund
d Derivatives fund
130. Mr X subscribes to a commercial paper with the face value of $5000. Mr Y purchases a
certificate of deposit of $ 5000 face value which pays 5% interest. Which of the following
statements is true?
a The initial investment of Mr X is higher than that of Mr Y
b Both of them start with an initial investment of $ 5000
c The initial investment of Mr Y is higher than that of Mr X
d Mr Y can not sale certificate of deposit to other investors while Mr X
can sell commercial paper to other investors
131. Mr P invests in debt securities and Mr Q invests in equity shares. Which of the
following is true in this case?
a The possibility of capital gains is higher in case of Mr Q
b Mr Q takes a lower risk than that of Mr P
c The possibility of capital losses is higher in case of Mr P
d Both a & c above
135. Duplicate Financials is a broking house which buys and sells securities over-the-counter
in US. The employees of the firm have followed fraudulent practices while dealing in
securities. The firm is expecting some strict action against it. This action is likely to be
taken by -----
a NASDAQ
b NASD
c Stock Exchanges
d FSA
136. An investor in US purchased certain securities on Friday. His broker has promised him
the delivery of these securities as soon as the broker gets them i.e. on Monday. The
settlement cycle in this case is on ---- basis.
a T+1
b T+2
c T+3
d T+5
138. A sell side analyst recommends buying of shares of ABC Corporation. He is likely to be
employed at present by ----.
a Managed Investment Company
b Mutual Fund
c Broking firm
d Stock exchange
139. ABC Corporation’s shares are listed on a stock exchange. They are generally traded
once in a week. Hence, in this context, we can say that the investors holding the stock of
this company suffer from -----
a price risk
b market risk
c liquidity risk
d credit risk
140. Price of a company’s share fell down by $10 during the day. The short sellers who took
such positions in the stock in the morning are likely to have -------
a gained
b lost
c not experienced any losses or gains
d not covered their positions
144. For trade processing, ------ provides seamless connectivity for the entire trade
processing without manual intervention.
a. automated processing
b. direct processing
c. straight through processing
d. accelerated processing
146. Mr X purchases and sells a type of money market instrument on a daily basis. He can
easily sell or buy a large quantity of this money market instrument in a short time. Which of
the following is true in this context?
a. This indicates heavy trading, hence the instrument must be commercial
paper
b. This indicates thin trading, hence the instrument must be commercial
paper
c. This indicates heavy trading, hence the instrument must be treasury
bills
d. This indicates thin trading, hence the instrument must be treasury bills
147. If Primary markets are witnessing heavy activity, we can say that ----------
a. the trading in shares and fixed income securities is very heavy
b. a large number of companies are listed
c. a large number of companies are raising debt or equity capital
d. market capitalization of individual companies is going up
148. Mr A sits at home and buys / sells securities through the internet. Hence we can
conclude that ------
a. he is engaged in electronic trading with no broker in between
b. he is engaged in web trading with no broker in between
c. he is engaged in web trading through an online broking firm
d. he is engaged in electronic trading through online services of stock
exchange