Gauhati University Question Papers
Investing in stock markets’ 2020 (Honours Generic)
Paper: COM-GE-1046 (B)
1. Answer the following as directed: 1×10=10
(a) F.P.O. stands for
1. Follow on Premium Offer.
2. First Premium Offer.
3. First Public Offer.
4. Follow on Public Offer. (Choose the correct alternative)
Ans: 1. Follow on Premium Offer.
(b) Which of the following exchanges provide the facility of commodity future trades?
4. All of the above. (Choose the correct alternative)
Ans: 4. All of the above. (Choose the correct alternative)
(c) State whether the following statement are ‘true’ or ‘false’.
Share prices on Stock Exchanges are determined by SEBI. False
(d) State whether the following statement is ‘true’ or ‘false’:
Investment in equity is safer than bank fixed deposit. False
(e) Liquidity ratio of a company basically consists of
1. Current ratio.
2. Acid test ratio.
3. Both (i) and (ii).
4. None of the above. (Choose the correct alternative)
Ans: 3. Both (i) and (ii).
(f) On which date SEBI introduced (New regulation) compulsory trading of shares of all the companies listed in the stock exchange in ‘DEMAT’ form?
1. 1st January, 2016.
2. 1st April, 2017.
3. 1st January, 2018.
4. 1st April, 2019. (Choose the correct alternative)
Ans: 4. 1st April, 2019. (Choose the correct alternative)
(g) Securities and Exchange Board of India (SEBI) was constituted in the year (Choose the correct alternative)
(h) State whether the following statement is ‘True’or ‘False’:
Commodity derivative are used only for hedging. True
(i) Which one of the following is the first public sector mutual fund in India?
1. SBI Mutual Fund.
2. Can Bank Mutual Fund.
3. UTI Mutual Fund.
4. HDFC Mutual Fund. (Choose the correct alternative)
Ans: 1. SBI Mutual Fund.
(j) NSE was set up in the year (Choose the correct alternative)
2. Answer the following questions in about 50 words each: 2×5=10
a) Mention two characteristics of investment.
Ans: Features of an Investment
1) Safety: Safety is one of the most important features that an investor desires from investments. Every investor expects to get back the initial capital on maturity without loss and without delay. Investment safety is gauged through the reputation established by the borrower of funds. A highly reputed and successful corporate entity assures the investors of their initial capital.
2) Liquidity: A liquid investment is that which can be converted into cash immediately at full market value in any quantity whatsoever. Every investor must ensure a minimum liquidity in his investments. To ensure liquidity, the investor should keep a part of his total investments in the form of readily saleable securities. Marketable securities, gold and very short term Investments are highly liquid but real estate, insurance policy, pension fund, fixed time securities etc. cannot ensure immediate liquidity.
b) What is Earning Per Share (EPS)?
Ans: EPS can be defined as monetary value of earnings per outstanding equity shares for a company. It is calculated by dividing amount of profits available for equity shareholders by number of equity shares outstanding in the market. EPS is the most important and common tool which is used by investors while taking investment decisions.
c) What is meant by Money Market Mutual Fund?
Ans: Money market Mutual Funds (MMMFs) were introduced in April 1991 to provide an additional short term avenue for investment and bring money market investment within the reach of individuals. These mutual funds would invest exclusively in money market instruments. MMMFs, bridge the gap between small individual investors and the money market MMMFs mobilizes savings from small investors and invest them in short term debt instruments or money market instruments.
d) Give the definition of derivative according to Securities Contract (Regulation) Act (SCRA) 1956.
Ans: According to the Securities Contract Regulation Act, (1956) the term “derivative” includes:
(i) A security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;
(ii) A contract which derives its value from the prices, or index of prices, of underlying securities.
e) What do you mean by company analysis?
Ans: Company analysis is a process which is carried out by investors to evaluate company’s financial strength and weakness, strength and weakness of management, capacity of company to compete and also the future prospects of company.
3. Answer any four questions of the following in about 150 words each: 5×4=20
(a) Discuss the functions of Stock Exchange.
(b) Explain different types of financial futures.
(c) Write any five features of equity share.
Ans: Equity Shares Features
1. Owned capital: Equity shareholders are the owners of company and amount invested by them is owned capital.
2. Fixed nominal value: Every share has fixed nominal value which is called face value of shares. Face value of shares may be Rs. 1, Rs. 2 , Rs. 5 , Rs. 10, Rs. 100 etc.
3. Distinctive number: Each equity shares are distinctly numbered so that they can be easily identified.
4. Rights of shareholders: A share gives its owner the right to receive dividend, the right to vote, the right to attend meetings, the right to inspect the books of accounts.
5. Dividend: Every shareholder is entitled to a return on shares which is known as dividend. Dividend depends on the profits made by a company. Higher the profits, higher will be the dividend and vice versa.
Write a note on comparative analysis of companies.
(d) Give any five distinctions between primary market and secondary market.
(e) Describe the importance of NAV for the investor.
(f) Write a note on DMAT Account.
Answer the following questions in about 600 words each: 10×4=40
(a) Discuss in detail the features of capital market. 10
Ans: Capital Market Meaning
Capital Market is generally understood as the market for long-term funds. This market supplies funds for financing the fixed capital requirement of trade and commerce as well as the long-term requirements of the Government. The long-term funds are made available through various instruments such as debentures, preference shares, and common shares. The capital market can be local, regional, national, or international. The capital market is classified into two categories, namely,
1. Primary market or new issue market, and
2. Secondary market or stock exchange.
Capital Market Features
1. Dealing in Securities: It deals in many types of financial instruments. These include equity shares, preference shares, debentures, bonds, etc. These are known as securities. It is for this reason that capital market is known as ‘Securities Market’.
2. Segments: It included both primary and secondary market. Primary market is meant for issue of fresh shares and secondary market facilitates buying and selling of second hand securities.
3. Investors: It includes both individual investors and institutional investors such as Mutual funds, banks, Insurance companies etc. It also includes foreign institutional investors.
4. Link between savers and investment opportunities: Capital market is a crucial link between saving and investment process. It facilitates flow of long term capital from those who have surplus capital to those who need capital.
5. Participants of capital market: The constituents (players) in the capital market include individuals and institutions. They include individual investors, investment and trust companies, banks, stock exchanges, specialized financial institutions etc.
6. Intermediaries: It acts through intermediaries which includes bankers, brokers, underwriters etc.
7. Government rules and regulations: The capital market operates freely but under the guidance of government policies. These market functions within the framework of government rules and regulations.
Give the meaning of bond and explain its advantages and disadvantages. 2+4+4=10
(b) Discuss different types of mutual funds based on structure. 10
“Mutual Funds provide stability to share prices, safety to investors and resources to prospective entrepreneurs.” Analyse. 10
Ans:A mutual fund is a special type of institution which acts as an investment intermediary and channelizes the savings of large number of people towards the corporate securities in such a way that investors get steady returns and capital appreciation at low risk. It is beneficial for both capital markets and investors. Mutual funds are gaining popularity now days due to the following advantages:
1. Professional Management: A small investor cannot be an expert in portfolio management so there is a chance of loss for small investors. Mutual funds offer investors the opportunity to earn an income or build their wealth through professional management of their investible funds. There are several aspects to such professional management viz. investing in line with the investment objective, investing based on adequate research, and ensuring that prudent investment processes are followed.
2. Stability in Capital Markets: Mutual funds institutions invests in capital market on behalf of their customers. For small investors it is not possible to deal with the fluctuations in stock market thats why they took the path of investment through mutual funds. Mutual funds institutions buy shares in stock market regularly which acts as a key support for Indian stock market. Previously Indian stock market was dominated by foreign institutional investors but now Indian Mutual Funds Institutions are big players in Indian Stock Market.
2. Diversification: It is not possible for small investors to invest in variety of sectors. They mainly invest in few selected securities and rely on them for good return. An investor in a mutual fund gets the advantage of being invested in the entire fund’s portfolio which is invested in a diversified sector. Thus, even a small investment of Rs 5,000 in a mutual fund scheme can give investors a diversified investment portfolio.
3. Economies of large Scale investment: The pooling of large sums of money from so many investors makes it possible for the mutual fund to engage professional managers to manage the investment. Individual investors with small amounts to invest cannot, by themselves, afford to engage such professional management.
4. Liquidity: The most peculiar advantage of a mutual fund is that investments made in its schemes can be converted into cash promptly with incurring any heavy expenditure. As per the regulations of SEBI, is becomes necessary for every mutual funds institutions is to ensure liquidity for its investors.
5. Tax Benefits: Mutual funds are not liable to pay tax on the income they earn. If the same income were to be earned by the investor directly, then tax may have to be paid in the same financial year. Specific schemes of mutual funds (Equity Linked Savings Schemes) give investors the benefit of deduction of the amount invested, from their income that is liable to tax. This reduces their taxable income, and therefore the tax liability.
6. Low risk: Mutual funds invest in a diversified sector and these funds are managed by highly qualified professionals. So, risk factor is reduced which is not possible in case of direct investment by an individual.
7. Higher return: Various reports now ensure that mutual funds are giving higher return with low risk as compared to other investment vehicles. But this is only possible when portfolio is well diversified and fund managers are efficient.
8. Convenient Options: The options offered under a scheme allow investors to structure their investments in line with their liquidity preference and tax position. Mutual funds also provide switch option form one scheme to another scheme.
9. Investment Comfort: Once an investment is made with a mutual fund, they make it convenient for the investor to make further purchases with very little documentation. This simplifies subsequent investment activity.
10. Regulatory Comfort: The regulator, Securities & Exchange Board of India (SEBI) has mandated strict checks and balances in the structure of mutual funds and their activities. These are detailed in the subsequent units. Mutual fund investors benefit from such protection.
11. Systematic approach to investments: Mutual funds also offer facilities that help investor invest amounts regularly through a Systematic Investment Plan (SIP); or withdraw amounts regularly through a Systematic Withdrawal Plan (SWP); or move moneys between different kinds of schemes through a Systematic Transfer Plan (STP). Such systematic approaches promote an investment discipline, which is useful in long term wealth creation and protection.
From the above discussion, we can say that “Mutual Funds provide stability to share prices, safety to investors and resources to prospective entrepreneurs.”
(c) What is online stock trading? Elaborate the advantages and disadvantages of online stock trading. 2+(4+4)=10
Mention the common steps to be followed for investment in mutual fund online. 10
(d) What is meant by options? Also point out the distinction between option and future contract. 2+8=10
1) Why is forward contracting useful? 5
Ans: Future Contracts Meaning
A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. On the expiration date, the contract has to be settled by delivery of the asset.
Other contract details like expiration date, price and quantity are negotiated bilaterally by the parties to the contract. On the expiration date, the contract has to be settled by delivery of the asset. The forward contracts are normally traded outside the exchanges.
The general benefits of using forward contracts are as follows:
1. Reduction of business risk: A prudent use of forward contract is that it can help to manage or reduce various business risks such as fluctuation in exchange rate, reduction in prices of commodities at low transaction cost.
2. Reduction in financing cost: The innovative use of forward contracts is that is can reduce the financing cost of end-users.
3. Customization of forward contracts: Each forward contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality.
4. Physical delivery: On the expiration date, the contract has to be settled by delivery of the asset. Assets are physically transferred from the short position to the long position according to the term mentioned in the contract.
5. Profits: Forward contracts can be used to speculate and make profits by assuming certain risks, probably with suitable degrees.
6. Asset management: Forward contracts play an important role in asset management due to their lower transaction costs relative to the spot market instruments.
2) Write a note on Regulatory Framework of Indian Securities Market. 5