NCFM Capital Market (Dealers) common mistakes
NCFM Capital Market (Dealers) · Understand the traps and how to avoid them.
Confusing the NSE/BSE dealer registration categories and treating a dealer (proprietary trading) as if it were an investment adviser or a broker, so questions on permitted activities, net-worth thresholds, and who may accept client funds get answered by analogy to the wrong intermediary type.
Candidates study 'capital market' broadly and collapse the SEBI intermediary categories into one mental model; the exam tests the specific dealer obligations (own-account trading, no client funds, no advisory unless separately registered), and candidates default to broker behaviour.
What to do instead
Build a one-page comparison table of SEBI intermediary categories (dealer, broker, investment adviser, portfolio manager) with columns for activity, net worth, whether client funds may be handled, and registration conditions. Rehearse the dealer row until you can state it from memory, then answer each question by first classifying the intermediary named in the stem.
Applying a single settlement cycle to every security, instead of distinguishing T+1 for equities from the settlement cycles of debt, government securities, and currency derivatives, and mislabeling T+0 or T+2 as the current equity norm.
Settlement cycles have changed repeatedly and candidates carry over the cycle current when they first studied; the exam expects the cycle actually in force for each market segment, and mixing segments produces a plausible but wrong answer.
What to do instead
Memorize a segment-to-cycle grid: equities, debt, G-sec, and currency derivatives each with their current cycle and the regulator source. Re-verify against the current SEBI/NSE circular before the exam rather than relying on older notes, and write the grid from memory daily until it is automatic.
Treating the free-float market capitalization method and the full market capitalization method as interchangeable when reasoning about index weights, and therefore mis-answering questions on why an index moves differently from the total market or on which stocks drive index change.
Candidates learn 'market cap weighted' as a single phrase and never separate free-float from full cap; index maintenance questions then seem arbitrary because the underlying weighting rule is missing.
What to do instead
Work through one index reconstitution by hand: take a small set of stocks, compute weights under both methods, and note how a promoter holding changes the free-float weight. Then answer index questions by explicitly stating the weighting method before computing or reasoning.
Answering index calculation questions by adding or averaging stock prices rather than using the index divisor, and failing to adjust the divisor for corporate actions such as splits, bonus issues, and rights issues.
Candidates treat an index as a simple average of prices; the divisor mechanism is abstract until practiced, and corporate-action adjustments are the part most often skipped in study.
What to do instead
Practice three numerical problems: compute an index level from base market cap and divisor, recompute after a split, and recompute after a bonus issue. For each, write the divisor-adjustment equation before substituting numbers, so the method is visible and the arithmetic error surface is reduced.
Confusing the buyer's and seller's obligations in an option and misstating intrinsic value versus time value, e.g., calling the option premium the maximum loss for a writer or treating time value as present in a deep in-the-money option at expiry.
Payoff diagrams are learned visually and the asymmetry of rights versus obligations blurs; candidates memorize 'premium is the maximum loss' without attaching it to the correct side of the contract.
What to do instead
Draw the four payoff diagrams (long call, short call, long put, short put) from scratch, labeling maximum profit, maximum loss, and breakeven on each. Then state, for each position, whether the holder has a right or an obligation, and compute intrinsic and time value for one ITM, one ATM, and one OTM example.
Mixing up the Greeks: attributing theta to volatility, vega to time decay, or claiming delta of a deep in-the-money call approaches zero, and ignoring the sign of the Greek for short positions.
The Greek names are opaque and candidates learn them as labels without the underlying sensitivity; sign conventions for writers are consistently dropped.
What to do instead
For each Greek, write one sentence in the form 'change in option price per one-unit change in X' and one numeric example. Then make a sign table with rows for long call, short call, long put, short put and columns for delta, gamma, theta, vega, and rho, and fill it from memory.
Quoting currency derivative positions in the wrong direction, e.g., treating a USD/INR quote as INR per USD in one question and USD per INR in the next, and misidentifying which currency is the base and which is the quote when computing contract value or mark-to-market.
Currency pairs are read casually and the base/quote convention is never fixed in the candidate's mind; contract size and settlement in INR add a second layer of confusion.
What to do instead
Fix the convention explicitly: in USD/INR the base is USD and the quote is INR, so the rate is rupees per dollar. For every numerical question, first write 'base = ___, quote = ___' and 'contract value in INR = contract size × rate', then substitute. Practice converting one position both ways to confirm the direction.
Ignoring the difference between exchange-traded and over-the-counter currency derivatives, and answering questions on counterparty risk, margining, or settlement as if OTC forwards carried exchange clearing guarantees.
Candidates learn 'currency derivatives' as a single topic and apply exchange features (daily mark-to-market, clearing corporation guarantee) to OTC forwards, or the reverse, because the distinction is not emphasized in summary notes.
What to do instead
Maintain a two-column comparison of exchange-traded versus OTC currency derivatives covering counterparty risk, margin, standardization, settlement, and regulation. For each practice question, identify the venue first and only then apply the features of that venue.
Confusing yield-to-maturity with coupon rate and current yield, and assuming a bond trading at a premium has a YTM above its coupon, or that price and yield move in the same direction.
The three yield measures are taught together and the inverse price-yield relationship is stated but not internalized; candidates then reason by intuition instead of by the relationship.
What to do instead
Work one bond through all three measures: coupon rate, current yield, and YTM, at a price above par, at par, and below par. Record the direction of each comparison and state the rule in words: premium price means YTM below coupon, discount price means YTM above coupon, and price and yield always move inversely.
Treating duration as a fixed property of a bond rather than a measure that changes with maturity, coupon, and yield, and misapplying modified duration to estimate price change without the correct sign or the convexity caveat.
Duration is memorized as 'years' and confused with maturity; the modified duration approximation is applied mechanically without checking direction or the limits of the linear estimate.
What to do instead
Compute Macaulay and modified duration for two bonds differing only in coupon, then estimate the price change for a 1% yield move using modified duration and compare with the exact repriced value. Note the sign convention and the convexity gap, and state the rule that higher coupon and higher yield both reduce duration.