MODEL QUESTION PAPER

I Semester [Link] (CUFYUGP) Degree Examinations October 2024

COM1FM105 (2): STOCK MARKET FUNDAMENTALS

(Credits: 3)

Maximum Time: 1.5 hours Maximum Marks: 50

Section A

[Answer All. Each question carries 2marks] (Ceiling: 16 Marks)

[Link] out the three accounts required to start stock market investment.

Bank Account, Demat Account and Trading account (Explain meaning of three)

[Link] two mandatory KYC documents to start stock market investment online.

• PAN Card (Mandatory)

• Proof of Address (Mandatory)

• Proof of Identity (Mandatory)

• AADHAAR Card (If required)

• Canceled Bank Cheque (If required)

• Bank Account Statement, ITR, etc.

[Link] do you mean by mutual fund?

A mutual fund is a company that pools money from many investors and invests the money in
securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund
are known as its portfolio.

[Link] intra-day trading.

Intraday trading, also known as day trading, is the practice of buying and selling stocks,
commodities, currencies, ETFs, or derivatives within the same trading day. The goal of intraday
trading is to profit from price fluctuations in the stock market within a single day.

[Link] is IPO?

An initial public offering (IPO) is when a private company sells its shares to the public for the first
time on a stock exchange.
[Link] and explain ASBA.

ASBA stands for Application Supported by Blocked Amount, a process that allows investors to
apply for Initial Public Offers (IPOs) and other issues by authorizing their bank to block funds in
their account

[Link] is Book building?

Book building is a process used to determine the price of shares during an initial public offering
(IPO) or bond issuance. It involves inviting investors to submit bids for the shares, and then using
the resulting demand to set the final price.

[Link] do you mean by listing of shares?

Listing of shares, also known as going public, is when a company's stock is made available for
public trading on a stock exchange.

[Link] the term ‘Dividend’

A dividend is a distribution of profits by a corporation to its shareholders, after which the stock
exchange decreases the price of the stock by the dividend to remove volatility. The market has no
control over the stock price on open on the ex-dividend date, though more often than not it may
open higher.

[Link] is SIP in mutual fund?

SIP stands for Systematic Investment Plan, which is a method of investing in mutual funds by
regularly contributing a fixed amount of money. SIPs are a popular way to invest because they
help investors build wealth over time and can be a good option for those who don't have a large
amount of money to invest.
 Section B

[Answer All. Each question carries 6 marks] (Ceiling: 24 Marks)

11. Distinguish Primary Market and Secondary market

Primary market Secondary market

Definition

A primary market is a marketplace where A secondary market is a prototype of the

corporations imbibe a fresh issue of shares for capital market where debentures, current
being contributed by the public for soliciting shares, options, bonds, treasury bills,
capital to meet their necessary long-term funds commercial papers, etc., of the enterprises
like extending the current trade or buying a are patronised amongst the investors.
unique entity.

Also known as

New issue market (NIM) Aftermarket

Purchasing type

Direct purchase Indirect purchase

Parties of buying and selling

Buying and selling takes place between the Buying and selling takes place between
company and the investors. the investors.

To whom it provides financing

 It provides financing to the existing companies It does not provide any kind of financing.
for facilitating growth and expansion.

Intermediaries involved

Underwriters Brokers

Price levels

Remain fixed Price level varies with variations in

demand and supply

12. Write and explain any four methods of public issue.

Here are some methods of public issue:

• Initial Public Offer (IPO)

A company can only do this once in its lifetime. The general public and institutional investors
can assess the information in the prospectus about the initial sale of shares.

• Follow-on Public Offer (FPO)

A company can raise funds through FPOs any number of times.

• Rights issue

A company offers existing investors the chance to purchase more securities at a predetermined
price.

• Bonus issue

A company offers existing investors the chance to receive additional free shares.

• Private placement

A company sells securities to a select group of investors, such as institutional investors or high-
net-worth individuals.
 • Preferential issue

A company issues securities to a specific group of people on a private placement basis.

13. Write and explain any four types of orders in secondary market.

Here are some types of orders in the secondary market:

• Market order

Also known as a normal order, this order is used to buy or sell a stock at the current market
price.

• Limit order

This order prevents investors from buying or selling at a price they don't want. It can be a buy
limit order or a sell limit order.

• Stop loss order

This order is triggered when a stock reaches a predetermined price. It's used to limit losses.

• Immediate or cancel (IOC) order

This order is executed immediately, but any part that can't be fulfilled is canceled.

• Cover order

This order allows you to enter a position and stop loss in the same trade. You can choose a limit
or market stop loss.

• Stop limit order

This order requires a specific price to be met that's different from the sale price.

• Bracket order

This complex order is made up of a primary order, a target order, and a stop-loss order. All three
orders are preset at the same time.

• Buy stop order

This order is entered at a stop price above the current market price. It's used to limit losses or
protect profits on a stock that's been sold short.

14. What is portfolio? How to diversify a portfolio?

A portfolio is a collection of investments, assets, and financial instruments that an individual or
organization holds. Portfolio diversification is the process of spreading investments across
different asset classes to reduce risk and increase potential gains.

• Asset allocation

Determine the right mix of assets based on your goals, risk tolerance, and time horizon.

• Index funds

A low-cost way to diversify a portfolio. You can buy into a portfolio that tracks a broad index, like
the S&P 500, with almost no management fee.

• Multi-asset allocation funds

Mutual funds that invest in a mix of asset classes, such as equity, debt, and gold.

• Target-date funds

Choose a future date as your investment goal, like retirement. When you're further away from the
goal, your funds will be invested in riskier assets.

Other things to consider when diversifying your portfolio include:

• Investment goals and risk tolerance

• Asset correlation

• Number of holdings

• Rebalancing

• Research and due diligence

• Costs and fees

• Staying informed

• Avoiding overlapping investments

• Assessing performance

15. Distinguish direct and regular mutual fund.

Direct and regular plans are the two variants of any mutual fund scheme that differ on the basis of
how you invest in them. Hence, it is important to understand the difference between them. Here
are some of the key differences based on Net Asset Value (NAV), Returns, and the Role of the
Financial Advisor:
 • Net Asset Value: Fund houses incur various expenses for managing the fund, which are
charged from the NAV of the fund. This is known as the expense ratio. As the regular fund
has a higher expense ratio due to the commission and brokerage involved, the NAV of the
regular schemes is generally lower than the direct plans since there is no commission or
brokerage in direct plans.

• Returns: Direct plans offer higher returns due to a lower expense ratio than regular funds.
You get the benefit from the exclusion of distributor commissions, which leads to higher
returns. Unlike direct plans, regular plans have a higher expense ratio, which eats out your
return and offers slightly lower returns.

• Role of Financial Advisor: In direct plans, you directly deal with the asset management
company. Here, you invest in the scheme as per your own decision and requirement hence,
there is no role of financial advisor. However, in the case of regular plans, financial advisors
assist you in the investment process. They help you decide where to invest and how much
to invest based on your investment objectives.

Section C

[Answer any one. Each question carries 10 marks] (1x10= 10 marks)

16. XYZ Ltd is planning to list its shares through an Initial Public Offering (IPO). The company
has informed the public through its prospectus that interested individuals can apply for the shares
using the ASBA mechanism. The shares are being offered at a price range of ₹ 72-77 under the
book-building process. If you want to apply for one lot of shares, what methods and options are
available to you for application? Explain in detail.

To apply for one lot of shares in an Initial Public Offering (IPO), you can use a broker or apply
through ASBA:

• Apply through a broker

1. Log in to your broker's online account

2. Go to the IPO tab and select the IPO you want to apply for

3. Enter the lot size and bid price

4. Enter your UPI ID and submit your bid

5. Approve the transaction in your UPI app

• Apply through ASBA

 1. Log in to your bank's website

2. Go to the "Demat Services" section and click on "New IPO"

3. Select the IPO name

4. Enter the lot size and price

5. Submit your bid

6. Approve the mandate request from your bank

ASBA stands for Application Supported by Blocked Amount. It's a system that allows investors to
apply for shares in an IPO without paying upfront. The funds are only debited once the shares are
allotted.

Benefits of ASBA:

Here are some unique benefits of ASBA.

• In the ASBA application, the bank blocks the money in your account, and you continue
earning interest on it.

• The ASBA application process is paperless and has eliminated the need to write
cheques/demand drafts.

• It is hassle-free and doesn’t involve any cost. Individuals can apply using Netbanking and
without submitting any document.

• It has made the refund process transparent. If you aren’t allotted IPO shares, the SCSB
unblocks and releases the money to your account.

• The blocked amount is considered in calculating the Average Quarterly Balance in the
account.

• ASBA prevents the IPO issuer from using the funds before allotting the shares

Detailed ASBA application process:

You can avail yourself of the ASBA facility both online and offline.

Offline method of using ASBA application:

Here are some of the steps to apply for ASBA offline.

The ASBA form is available on BSE and NSE websites for download.

Fill out the details like

 • Name

• PAN card details

• Demat account number

• Bid quantity

• Bid pride

• Bank account number and Indian Financial System Code (IFSC)

Submit the form at the Self-certified Syndicate Bank and collect the acknowledgement receipt.

It allows your bank to block the amount in your account.

The bank will upload the details to the bidding platform.

Investors should ensure that the details in the ASBA form are correct to avoid it from getting
rejected.

Online method of IPO application using ASBA facility:

The online application system is simple and fast. Here are the steps below.

• Log in to your net banking portal and click on the net banking

• Choose IPO Application from the list of options available

• You will be redirected to the IPO application platform

• You will need to feel the basic details like name, PAN, bid quantity, bid price, and 16 digits
unique DP number

After applying for the ASBA IPO, you can check the application status on NSE or BSE websites.

Important points to note to avoid rejection of IPO application

• Once you have submitted the IPO application, the amount will get blocked in your account.
So, you will not be able to use the funds for other needs.

• You can apply for one IPO using one PAN. Your application will get rejected if you use the
same PAN to apply for the same IPO twice.

• Under ASBA, investors can apply up to three bids.

Situations that can lead to IPO application rejection

• If you do not have sufficient funds in your account

 • If the information furnished in your application is wrong

• If there is a mismatch in your name, PAN card details with the information in your Demat
account

• Multiple applications using a single PAN card

Eligibility criteria for using ASBA

Retail investors can use the ASBA application if they meet the following conditions.

• ASBA is available to Indian residents

• The applicant needs a Demat account and the Permanent Account Number (PAN)

• Individuals should have a banking account with an SCSB

IPO application process through UPI: An ASBA alternative

Small investors bidding up to Rs 2 lakh can use UPI to bid for IPOs. Here are the steps to use UPI
to apply for an upcoming IPO.

• Log in to the client portal of your broker’s website. There you will find an option to apply
for IPO online.

• Select the IPO you want to bid for.

• In the bidding window, you can change the bid size and cut-off price.

• In the UPI details window, enter UPI payment details.

• You will get a payment request on your UPI app. Accept the payment request to complete
the bidding process.

• You will receive SMS and email notification that your application is successful.

17. ABC Ltd is a listed company on both NSE and BSE, with the last traded price of its shares at
₹116. You are considering purchasing the company’s shares in the secondary market. What
fundamental factors should you consider before buying the shares of ABC Ltd?

THIS IS QUESTION ON FUNDAMENTAL ANALYSIS. EXPLAIN ABOUT ECONOMY,

INDUSTRY AND COMPANY ANALYSIS FACTORS.

OR EXPLAIN ABOUT VARIOUS FACTORS LIKE THE FOLLOWING.

Before buying a company's shares in the secondary market, you can consider the following
fundamental factors:
 • Company performance

Research the company's performance over the past five years, including earnings per share, price-
to-earnings ratio, price-to-book ratio, dividend, and return on equity.

• Financial ratios

Compare financial ratios across years and between peers in the same industry or sector. Some
common ratios include the debt-to-equity ratio, price-to-earnings ratio, earnings per share, working
capital ratio, quick ratio, and return on equity.

• Dividend

Consider the company's dividend rate. Dividends are a steady stream of income for investors, and
are often issued quarterly.

• Industry trends

Consider the company's industry, including its customer base, market share, competition,
regulation, and business cycles.

• Corporate governance

Evaluate the company's governance practices, board structure, and how it protects shareholder
rights.

• Regulatory environment

Consider how current and potential regulations might affect the company's operations.

• Market conditions

Analyze consumer behavior and market trends that could impact the company's performance.

• Historical performance

Analyze how the company performed during economic highs and lows to understand how it
handles economic and industrial booms and busts.