Vikram Reddy
IFIM College
B. Com Degree - Semester II
Fundamentals of Investments in Stock Market
Continuous Internal Evaluation - 1 (April 2024)
Time: 2 Hrs.
Max Marks: 50
Section A
Answer ALL the following questions
1. (a) Define Investment. What are the objectives of Investment?
Investment is the allocation of resources, usually money, with the expectation of generating an
income or profit. This can include purchasing stocks, bonds, real estate, or other financial assets.
The objectives of investment include:
o Capital Appreciation: Increase in the value of the invested principal over time.
o Income Generation: Earn regular income through dividends, interest, or rent.
o Safety of Principal: Protect the invested amount from loss.
o Liquidity: Ensure the investment can be easily converted into cash when needed.
o Tax Benefits: Take advantage of tax-efficient investment options.
OR
(b) Define the Financial System. Explain the functions of the Financial System.
The Financial System refers to a network of institutions, markets, instruments, and services that facilitate
the flow of funds and allocation of resources in an economy. The key functions of the financial system
are:
o Facilitating Savings: Providing avenues for individuals and entities to save money.
o Allocating Resources: Directing funds from savers to borrowers for productive uses.
o Risk Management: Offering instruments like insurance and derivatives to manage risk.
o Price Discovery: Determining the price of financial instruments through supply and
demand in markets.
o Liquidity Provision: Ensuring that financial assets can be easily bought or sold.
o Regulation and Supervision: Ensuring the stability and integrity of the financial system
through regulation.
2. (a) Explain in detail about any four parties involved in the secondary market.
The Secondary Market is where existing securities are traded among investors. Four key parties
involved are:
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o Stock Exchanges: Platforms where securities are bought and sold, providing liquidity
and transparency.
o Brokers: Licensed individuals or firms that facilitate the buying and selling of securities
for clients.
o Investors: Individuals or institutions that buy and sell securities for investment purposes.
o Market Makers: Entities that provide liquidity by quoting both buy and sell prices for
securities.
OR
(b) Define Risk. Explain any two types of systematic risk.
Risk in finance refers to the potential for loss or the uncertainty regarding returns on an investment. Two
types of systematic risk are:
o Market Risk: The risk of losses due to overall market movements. For example, a
decline in the stock market affecting all stocks.
o Interest Rate Risk: The risk of changes in interest rates affecting the value of
investments, particularly bonds.
3. (a) Point out any four differences between Money Market and Capital Market.
Money Market:
o Short-term (up to one year) financial instruments.
o Instruments include Treasury bills, commercial paper, and certificates of deposit.
o Provides liquidity for short-term funding needs.
o Generally low risk with lower returns.
Capital Market:
o Long-term financial instruments (more than one year).
o Instruments include stocks, bonds, and debentures.
o Facilitates raising long-term funds for businesses and governments.
o Higher risk with the potential for higher returns.
OR
(b) Mention any four differences between Fundamental Analysis and Technical Analysis.
Fundamental Analysis:
o Evaluates a security's intrinsic value by examining economic, financial, and other
qualitative and quantitative factors.
o Focuses on financial statements, management quality, and industry conditions.
o Suitable for long-term investment decisions.
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o Involves analyzing earnings, revenues, and growth prospects.
Technical Analysis:
o Analyzes price movements and trading volumes using charts and technical indicators.
o Focuses on patterns, trends, and market sentiment.
o Suitable for short-term trading decisions.
o Involves tools like moving averages, MACD, and relative strength index (RSI).
4. (a) Define Stock Exchange. Explain the functions of the stock market.
A Stock Exchange is a regulated marketplace where securities, such as stocks and bonds, are
bought and sold. The functions of the stock market include:
o Providing Liquidity: Ensures that securities can be easily bought and sold.
o Price Discovery: Determines the price of securities through supply and demand.
o Raising Capital: Enables companies to raise funds by issuing new shares to investors.
o Risk Management: Offers derivatives and other instruments to hedge against market
risks.
o Regulation and Control: Ensures transparency, fairness, and investor protection.
OR
(b) Who are Underwriters? Explain the types of Underwriters.
Underwriters are financial intermediaries who assess and assume the risk of issuing new securities. They
ensure that securities are sold at a fair price and help companies raise capital. Types of underwriters
include:
o Firm Commitment Underwriters: Guarantee the sale of the entire issue and assume the
risk of unsold shares.
o Best Efforts Underwriters: Agree to sell as much of the issue as possible but do not
guarantee the sale of the entire issue.
o Syndicate Underwriters: A group of underwriters that pool their resources to share the
risk of a large issue.
5. (a) What are Derivatives? Explain the participants of the derivative market.
Derivatives are financial instruments whose value is derived from an underlying asset, such as
stocks, bonds, commodities, or currencies. Participants in the derivative market include:
o Hedgers: Use derivatives to reduce or eliminate the risk of price movements in an
underlying asset.
o Speculators: Seek to profit from price movements by taking on risk.
o Arbitrageurs: Exploit price discrepancies between different markets to earn risk-free
profits.
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o Margin Traders: Use borrowed funds to increase their investment positions.
OR
(b) Explain the following issue mechanisms: i) Public issue ii) Bonus issue.
Public Issue:
o A method where a company offers its shares to the general public for the first time
through an Initial Public Offering (IPO) or a follow-on public offering (FPO).
o It helps companies raise equity capital from a large number of investors.
o The shares are listed on a stock exchange, providing liquidity to investors.
Bonus Issue:
o A method where a company issues additional shares to its existing shareholders without
any cost, based on the number of shares already held.
o It is a way to distribute accumulated profits without paying cash dividends.
o Increases the total number of shares outstanding, reducing the share price and making it
more affordable for investors.
Section B
Answer any THREE of the following questions. Question Number 5 is Compulsory
1. Briefly discuss the steps involved in the Investment Process.
The investment process involves several steps to ensure informed and strategic decision-making:
o Setting Investment Goals: Define clear financial objectives, such as capital
appreciation, income generation, or risk management.
o Assessing Risk Tolerance: Evaluate the investor's ability and willingness to take on risk.
o Asset Allocation: Decide the proportion of the portfolio to be invested in different asset
classes (stocks, bonds, real estate, etc.).
o Security Selection: Choose specific securities within each asset class based on analysis
and research.
o Portfolio Construction: Build a diversified portfolio to minimize risk and optimize
returns.
o Monitoring and Rebalancing: Regularly review and adjust the portfolio to maintain
alignment with investment goals and market conditions.
o Performance Evaluation: Assess the portfolio's performance against benchmarks and
make necessary adjustments.
2. Mention the various types of information needed before investment. Explain the various
sources from where one can acquire information.
Types of Information Needed:
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o Economic Indicators: Data on inflation, interest rates, GDP growth, etc.
o Company Financials: Income statements, balance sheets, and cash flow statements.
o Industry Analysis: Trends, competition, and market conditions.
o Market Trends: Stock prices, trading volumes, and market sentiment.
o Regulatory Environment: Laws, regulations, and government policies affecting
investments.
Sources of Information:
o Financial Statements: Published by companies in their annual and quarterly reports.
o Stock Exchanges: Provide real-time data on stock prices and trading volumes.
o Financial News Outlets: Newspapers, magazines, and websites like Bloomberg,
Reuters, and CNBC.
o Research Reports: Published by brokerage firms, investment banks, and independent
analysts.
o Regulatory Bodies: Information from organizations like SEBI, SEC, and RBI.
3. Explain the top-down and bottom-up approaches in Fundamental Analysis.
Top-Down Approach:
o Macro Analysis: Start by analyzing the overall economy, considering factors like GDP
growth, inflation, and interest rates.
o Sector Analysis: Identify sectors that are expected to perform well in the current
economic environment.
o Industry Analysis: Focus on specific industries within the chosen sectors, evaluating
trends, competition, and market conditions.
o Company Analysis: Finally, select individual companies within the targeted industries
based on their financial health, management quality, and growth prospects.
Bottom-Up Approach:
o Company Analysis: Start with a detailed analysis of individual companies, evaluating
their financial statements, management, products, and competitive position.
o Industry Analysis: Examine the industry in which the company operates, considering
factors like market size, growth rate, and competitive dynamics.
o Sector Analysis: Assess the broader sector to understand its performance relative to the
overall economy.
o Macro Analysis: Finally, consider the macroeconomic environment to understand its
impact on the company and industry.
4. Draw the specimen of the following as under:
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o i) Japanese Candle Stick: A candlestick chart that shows the open, high, low, and close
prices for a security over a specific period.
o ii) Head & Shoulders: A chart pattern that indicates a potential reversal in the trend of a
security's price.
o iii) Points & Figures: A charting technique that focuses on price movements without
considering time.
o iv) Promissory Note: A written promise to pay a specific amount of money at a future
date.
o v) Treasury Bills: Short-term government securities issued at a discount and redeemed at
face value.
5. Compulsory Question (Case Study): Warren Buffet
o 1) How did investment in an ordinary company like "Berkshire Hathaway" help
Warren in earning high profits?
Warren Buffet's investment in Berkshire Hathaway, initially a struggling textile mill,
allowed him to leverage the company's assets and cash flow to make further strategic
investments. By acquiring control of Berkshire Hathaway, Buffet transformed it into a
holding company through which he could invest in other profitable businesses. His
disciplined investment approach, focusing on undervalued companies with strong
fundamentals, allowed him to generate substantial returns over time.
o 2) What factors would have Warren considered to assess a company?
Warren Buffet likely considered the following factors:
Financial Health: Strong balance sheet, consistent earnings, and cash flow.
Management Quality: Competent and trustworthy leadership.
Competitive Advantage: Unique products or services that provide a sustainable
edge over competitors.
Valuation: Stocks trading below their intrinsic value.
Growth Potential: Long-term growth prospects and market opportunities.
o 3) Why did he refuse to invest in Dotcom companies? Was he right?
Buffet refused to invest in dotcom companies because he believed many of them were
overvalued and lacked sustainable business models. His conservative investment
philosophy prioritized companies with proven track records and tangible assets. In
hindsight, his caution was justified, as the dotcom bubble burst in 2000, leading to
significant losses for many investors.
o 4) What are the benefits to shareholders when their companies are bought and sold?
Capital Gains: Shareholders can realize profits from the sale of their shares at a
higher price.
Liquidity: The sale of shares can provide shareholders with immediate cash.
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Improved Valuation: The acquisition can lead to a revaluation of the company,
potentially increasing the share price.
Strategic Synergies: Acquisitions can create synergies, enhancing the combined
company's performance and profitability.
o 5) What are dotcom companies?
Dotcom companies are businesses that operate primarily on the internet, often
characterized by their ".com" domain names. These companies emerged during the late
1990s and early 2000s, focusing on e-commerce, online services, and digital technology.
Many dotcom companies experienced rapid growth and high valuations, leading to the
dotcom bubble, which eventually burst due to the unsustainable nature of many business
models.
Continuous Internal Evaluation (CIE) - 2 (July 2024)
Subject Title: Fundamentals of Investing in Capital Markets
Subject Code: 21 [Link] OE25X
Time: 2 1/2 Hrs.
Max Marks: 60
Section A
Answer ALL the following questions
1. (a) What is NSE? Explain its objectives.
The National Stock Exchange (NSE) is one of the leading stock exchanges in India, established
to provide a transparent and efficient trading platform. Its objectives include:
o Providing a Modern Trading Platform: Leveraging technology to ensure efficient and
transparent trading.
o Ensuring Market Integrity: Implementing robust regulatory mechanisms to maintain
fair practices.
o Enhancing Liquidity: Facilitating easy buying and selling of securities.
o Educating Investors: Offering investor education programs to enhance market
knowledge.
(b) Discuss about any four parties involved in the primary market.
The Primary Market is where new securities are issued to the public for the first time. Four key parties
involved are:
o Issuing Companies: Firms that issue new securities to raise capital.
o Investment Banks: Underwriters that help companies in the issuance process, including
pricing and marketing.
o Regulatory Bodies: Authorities like SEBI that ensure compliance with legal and
regulatory requirements.
o Investors: Individuals and institutions that purchase the new securities.
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2. (a) What are Buy Back of shares? Mention any three reasons for Buy Back of Shares.
Buy Back of Shares refers to a company's repurchase of its own shares from the market. Three
reasons for buybacks include:
o Return of Surplus Cash: Efficiently using excess cash reserves.
o Improve Financial Ratios: Enhancing metrics like Earnings Per Share (EPS) by
reducing the number of outstanding shares.
o Prevent Hostile Takeovers: Reducing the number of shares available in the market to
deter potential takeovers.
OR
(b) What are Index Funds? What are the benefits of investing in Index Funds?
Index Funds are mutual funds or ETFs designed to replicate the performance of a specific market index,
such as the S&P 500. Benefits of investing in index funds include:
o Diversification: Broad exposure to an entire market segment, reducing risk.
o Lower Costs: Typically have lower management fees compared to actively managed
funds.
o Consistent Performance: Track the performance of the index, which usually reflects the
overall market trend.
o Simplicity: Easy to understand and manage as they follow a passive investment strategy.
3. (a) Define Prospectus. What does it contain?
A Prospectus is a formal legal document required by and filed with regulatory authorities that
provides details about an investment offering to the public. It contains:
o Company Overview: Information about the company’s business, history, and
management.
o Financial Information: Historical financial statements and future financial projections.
o Details of the Offering: Number and type of securities being issued, pricing, and use of
proceeds.
o Risk Factors: Potential risks associated with the investment.
o Legal and Regulatory Information: Compliance with relevant laws and regulations.
OR
(b) Explain the steps involved in Opening a Demat Account.
The steps to open a Demat Account are:
o Choose a Depository Participant (DP): Select a registered DP (bank, broker, or
financial institution).
o Fill Account Opening Form: Complete the application form provided by the DP.
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o Submit Documents: Provide required documents, such as identity proof, address proof,
PAN card, and passport-sized photographs.
o In-Person Verification (IPV): Attend a mandatory IPV process conducted by the DP.
o Sign Agreement: Sign an agreement with the DP outlining the rights and duties of both
parties.
o Account Activation: Upon verification, the DP will provide a unique Demat Account
Number and activate the account.
4. (a) What are Debentures? What are the types of Debentures?
Debentures are long-term debt instruments issued by companies to borrow funds from the public,
with a fixed interest rate and repayment period. Types of debentures include:
o Convertible Debentures: Can be converted into equity shares of the issuing company
after a specified period.
o Non-Convertible Debentures (NCDs): Cannot be converted into equity shares and are
redeemed at the end of the term.
o Secured Debentures: Backed by the company's assets, providing security to investors.
o Unsecured Debentures: Not backed by assets, relying solely on the creditworthiness of
the issuer.
OR
(b) Who are Depositories? Explain any four objectives of Depositories.
Depositories are institutions that hold and manage securities in electronic form, facilitating trading and
settlement. Four objectives of depositories are:
o Dematerialization: Converting physical securities into electronic form.
o Settlement of Trades: Ensuring efficient and secure transfer of securities during
transactions.
o Custody of Securities: Safekeeping of electronic securities.
o Reduction of Risk: Minimizing risks associated with physical certificates, such as loss,
theft, and forgery.
5. (a) Point out any four differences between Forward Market and Future Market.
Forward Market:
o Contracts are customized and privately negotiated.
o Settlement occurs at the end of the contract period.
o Higher counterparty risk due to lack of standardization.
o Not traded on formal exchanges; over-the-counter (OTC) market.
Future Market:
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o Contracts are standardized and publicly traded on exchanges.
o Daily settlement through mark-to-market.
o Lower counterparty risk due to the involvement of clearinghouses.
o Traded on formal exchanges like the Chicago Mercantile Exchange (CME).
OR
(b) Point out any four differences between Call Option and Put Option.
Call Option:
o Gives the holder the right to buy an asset at a specified price within a specified period.
o Beneficial when the underlying asset's price is expected to rise.
o Buyer pays a premium to the seller for the option.
o Potential for unlimited profit with limited loss (premium paid).
Put Option:
o Gives the holder the right to sell an asset at a specified price within a specified period.
o Beneficial when the underlying asset's price is expected to fall.
o Buyer pays a premium to the seller for the option.
o Potential for limited profit with limited loss (premium paid).
Section B
Answer any FOUR of the following questions.
6. Briefly explain about any five methods of floating shares in the New Issue market.
o Public Issue: Offering shares to the general public through a prospectus.
o Rights Issue: Issuing new shares to existing shareholders at a discounted price.
o Private Placement: Selling shares to a select group of investors, usually institutions.
o Offer for Sale: Selling existing shares to the public by promoters or major shareholders.
o Bonus Issue: Issuing additional shares to existing shareholders without any cost, based
on their existing holdings.
7. List out the roles and powers of SEBI.
o Regulation of Securities Markets: SEBI formulates and implements rules and
regulations to ensure fair trading practices.
o Protection of Investors: Safeguarding the interests of investors through investor
education and grievance redressal.
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o Monitoring Market Intermediaries: Regulating the activities of brokers, depositories,
and other intermediaries to ensure compliance.
o Prevention of Fraudulent Practices: Taking action against market manipulation, insider
trading, and other malpractices.
o Development of Markets: Promoting the development of securities markets and
enhancing their efficiency.
8. Write a note on OTCEI and NDSL.
o OTCEI (Over the Counter Exchange of India): Established to facilitate the trading of
small and medium-sized companies that are not listed on major exchanges. It aims to
provide a transparent and efficient trading platform for investors.
o NSDL (National Securities Depository Limited): India's first depository, established to
handle the dematerialization of securities. It offers services like account maintenance,
transaction settlement, and safekeeping of electronic securities.
9. Who are Brokers? Explain the various types of Brokers.
Brokers are intermediaries who facilitate the buying and selling of securities on behalf of
investors. Types of brokers include:
o Full-Service Brokers: Provide a wide range of services, including investment advice,
research, and portfolio management.
o Discount Brokers: Offer limited services at reduced costs, focusing mainly on executing
trades.
o Online Brokers: Provide trading platforms for investors to trade securities online at
lower fees.
o Robo-Advisors: Use automated algorithms to provide investment advice and portfolio
management services.
10. What are Mutual Funds? State its types.
Mutual Funds are investment vehicles that pool money from multiple investors to invest in a
diversified portfolio of securities. Types of mutual funds include:
Equity Funds: Invest primarily in stocks, aiming for capital appreciation.
Debt Funds: Invest in fixed-income securities like bonds, providing regular income.
Hybrid Funds: Combine equity and debt investments to balance risk and return.
Money Market Funds: Invest in short-term, low-risk securities for liquidity and safety.
Index Funds: Track the performance of a specific market index.
11. What are Swaps? Explain its types.
Swaps are derivative contracts where two parties agree to exchange cash flows or other financial
instruments. Types of swaps include:
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Interest Rate Swaps: Exchange of fixed interest rate payments for floating rate payments, or
vice versa.
Currency Swaps: Exchange of principal and interest payments in different currencies.
Commodity Swaps: Exchange of cash flows based on commodity prices.
Credit Default Swaps: Transfer of credit risk of a fixed-income product between parties