I85PREP
⌘ K
NCFM Financial Markets (Beginners) study materials
NCFM Financial Markets (Beginners) study resources

NCFM Financial Markets (Beginners) practice questions

One question at a time. Build your NCFM Financial Markets (Beginners) understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Equity Market

In the Indian equity market, which body is the primary statutory regulator responsible for protecting investors and regulating the securities market?

  1. Securities and Exchange Board of India (SEBI) Correct answer.
  2. Reserve Bank of India (RBI)
  3. Insurance Regulatory and Development Authority of India (IRDAI)
  4. Ministry of Corporate Affairs (MCA)

Explanation

SEBI is the statutory regulator established under the SEBI Act, 1992, and it oversees stock exchanges, intermediaries, and investor protection in the securities market. RBI regulates banking and monetary policy, while IRDAI regulates insurance and MCA handles company law.

Question 2Equity Market

A company wants its shares to be traded on a recognised stock exchange for the first time. This process of listing new securities for public subscription is best described as which market activity?

  1. Primary market issuance Correct answer.
  2. Short selling
  3. Block deal execution
  4. Secondary market trading

Explanation

The primary market is where a company issues new securities to investors and raises fresh capital through instruments such as an initial public offering. Secondary market trading involves buying and selling already-issued shares between investors without the company receiving new funds.

Question 3Equity Market

An investor buys 100 shares of a company at Rs 250 each and later sells them at Rs 310 each. Ignoring brokerage, taxes, and other charges, what is the capital gain?

  1. Rs 6,000 Correct answer.
  2. Rs 31,000
  3. Rs 25,000
  4. Rs 3,100

Explanation

The gain per share is Rs 310 minus Rs 250, which equals Rs 60, and multiplying by 100 shares gives Rs 6,000. Capital gain is computed on the difference between sale and purchase price, not on the total sale value.

Question 4Equity Market

Which of the following best describes a stock market index such as the Nifty 50?

  1. A single company's share price averaged over the year
  2. A guaranteed minimum return offered to index investors
  3. A basket of selected stocks whose combined value tracks overall market movement Correct answer.
  4. A government bond issued to finance market infrastructure

Explanation

An index is a statistical measure built from a defined basket of stocks, weighted by a chosen method, so that its value reflects the movement of that segment of the market. It is not a tradable guarantee or a debt instrument.

Question 5Equity Market

Under the standard Indian equity settlement cycle (T+1), if a trade is executed on Monday, on which day is the final settlement of funds and securities normally completed?

  1. Thursday
  2. Friday
  3. Tuesday Correct answer.
  4. Wednesday

Explanation

India moved to a T+1 rolling settlement cycle, meaning trades settle on the next business day after the trade date. A Monday trade therefore settles on Tuesday, subject to exchange holidays.

Question 6Equity Market

Which of the following is a characteristic of an equity share?

  1. A guaranteed return of the face value at maturity
  2. A fixed rate of interest paid regardless of profits
  3. A residual claim on profits and assets after all other claims Correct answer.
  4. Priority over bondholders in liquidation

Explanation

Equity shareholders are residual owners: they receive dividends only after other obligations are met and rank last in liquidation. This contrasts with debt, which carries fixed interest and priority claims.

Question 7Equity Market

A stock's price rises sharply after the company reports unexpectedly strong quarterly earnings. Which type of risk is most directly illustrated when a holder of that stock benefits from this event?

  1. Systematic market risk
  2. Interest rate risk
  3. Unsystematic or company-specific risk Correct answer.
  4. Currency translation risk

Explanation

Company-specific events such as earnings surprises drive unsystematic risk, which can be reduced through diversification. Systematic risk affects the whole market and cannot be diversified away.

Question 8Equity Market

An investor places a market order to buy a stock. Which outcome should the investor expect?

  1. Immediate execution at the best available prevailing price Correct answer.
  2. Execution guaranteed at the day's lowest price
  3. Execution only at the previous day's closing price
  4. Execution at a specified limit price or better

Explanation

A market order is executed at the best price currently available in the order book, prioritising speed over price certainty. The investor cannot control the exact execution price, especially in fast-moving markets.

Question 9Equity Market

A company declares a dividend of Rs 5 per share and the stock trades cum-dividend at Rs 205. On the ex-dividend date, all else equal, the stock price is expected to open near which level?

  1. Rs 205
  2. Rs 200 Correct answer.
  3. Rs 210
  4. Rs 195

Explanation

On the ex-dividend date, buyers no longer receive the declared dividend, so the price typically adjusts downward by the dividend amount, giving Rs 205 minus Rs 5, or Rs 200. The adjustment reflects the removal of the dividend entitlement.

Question 10Equity Market

Which of the following best explains why a stock exchange requires a circuit breaker or price band?

  1. To temporarily halt or limit trading when prices move beyond a defined threshold Correct answer.
  2. To guarantee profits for retail investors
  3. To fix the price of every listed stock at its book value
  4. To increase trading volume on volatile days

Explanation

Circuit breakers and price bands are market safeguards that pause or cap trading when prices swing beyond preset limits, giving participants time to absorb information. They aim to curb excessive volatility, not to guarantee outcomes or boost volume.

Question 11Equity Market

An investor wants to buy a stock only if it falls to Rs 480, and is unwilling to pay more. Which order should the investor place?

  1. A buy market order
  2. A sell limit order at Rs 480
  3. A sell stop-loss order at Rs 480
  4. A buy limit order at Rs 480 Correct answer.

Explanation

A buy limit order specifies the maximum price the investor is willing to pay, so it executes at Rs 480 or lower. It gives price control but not execution certainty if the stock never reaches that level.

Question 12Equity Market

A company announces a 1:2 bonus issue, meaning one new share for every two shares held. An investor holds 200 shares before the bonus. How many shares will the investor hold after the bonus issue?

  1. 400
  2. 300 Correct answer.
  3. 100
  4. 200

Explanation

For every two shares held, the investor receives one bonus share, so 200 shares yield 100 bonus shares. Adding these to the existing 200 shares gives a total of 300 shares, though the proportionate ownership value is unchanged.

Question 13Equity Market

Which market participant provides two-way quotes and stands ready to buy and sell securities to facilitate liquidity?

  1. Registrar and transfer agent
  2. Market maker Correct answer.
  3. Custodian
  4. Depository participant

Explanation

A market maker continuously quotes bid and ask prices and takes the other side of trades, thereby supplying liquidity. Custodians hold assets, registrars maintain shareholder records, and depository participants handle dematerialised holdings.

Question 14Equity Market

An investor wants to profit from an expected decline in a stock's price without owning the shares first. Which strategy fits this view?

  1. Buying a call option
  2. Purchasing a bond of the company
  3. Going long the stock
  4. Short selling the stock Correct answer.

Explanation

Short selling involves borrowing shares, selling them, and hoping to buy them back later at a lower price to return to the lender. It profits when the price falls, whereas long positions and call options profit when the price rises.

Question 15Equity Market

A stock has a price-to-earnings (P/E) ratio of 25, and its earnings per share are Rs 8. What is the market price per share?

  1. Rs 200 Correct answer.
  2. Rs 250
  3. Rs 3.13
  4. Rs 33

Explanation

The P/E ratio equals market price divided by earnings per share, so price equals P/E multiplied by EPS, giving 25 x 8 = Rs 200. This valuation metric links the share price to the company's earnings.

Question 16Equity Market

An investor holds a diversified portfolio of 50 stocks across sectors. Which risk remains largely unavoidable in this portfolio?

  1. Systematic market risk Correct answer.
  2. Idiosyncratic earnings risk of one firm
  3. Company-specific management fraud risk
  4. Risk of a single product recall

Explanation

Diversification reduces unsystematic, company-specific risks but cannot eliminate systematic risk, which stems from broad market, economic, and geopolitical factors. A wide portfolio still moves with the overall market.

Question 17Equity Market

A company's stock trades at Rs 500 with earnings per share of Rs 25 and a book value per share of Rs 250. What is the price-to-book (P/B) ratio?

  1. 2.0 Correct answer.
  2. 20.0
  3. 10.0
  4. 0.5

Explanation

The P/B ratio equals market price per share divided by book value per share, so Rs 500 divided by Rs 250 equals 2.0. The P/E of 20 is a separate metric derived from earnings, not book value.

Question 18Equity Market

An investor holds 1,000 shares of a company and the company announces a 2:1 stock split. What is the effect on the investor's holding and on the share price, all else equal?

  1. Shares double and the price stays the same, doubling total value
  2. Shares double and the price roughly halves, leaving total value broadly unchanged Correct answer.
  3. Shares halve and the price doubles, increasing total value
  4. Shares stay the same and the price halves, reducing total value

Explanation

In a 2:1 split, each existing share becomes two, so the holding doubles to 2,000 shares while the price adjusts to roughly half. The total market value of the holding is essentially unchanged because the split does not alter the company's fundamentals.

Question 19Equity Market

An analyst notes that a stock's beta is 1.4. Which interpretation is most appropriate?

  1. The stock is guaranteed to return 1.4 times the risk-free rate
  2. The stock is 40% less volatile than the market and tends to fall when the market rises
  3. The stock is expected to move about 40% more than the market in the same direction Correct answer.
  4. The stock's dividend yield is 1.4 times the market average

Explanation

Beta measures a stock's sensitivity to market movements; a beta of 1.4 indicates it tends to amplify market moves by about 40% in the same direction. It is a measure of systematic risk, not a dividend or return guarantee.

Question 20Equity Market

An investor wants to limit potential losses on an existing long stock position while retaining upside. Which action best achieves this?

  1. Selling a call option on the shares
  2. Selling the shares short
  3. Buying a call option on the shares
  4. Buying a put option on the shares Correct answer.

Explanation

Buying a put gives the right to sell the shares at a set strike price, acting as insurance that caps downside loss while the investor keeps the shares and their upside. Selling a call or shorting the stock does not protect a long position in the same way.

Question 21Indices

A stock market index is best described as a number that:

  1. summarises the prices of a defined basket of securities relative to a base period Correct answer.
  2. equals the market capitalisation of a single large company
  3. records the total dividend paid by listed companies
  4. guarantees a fixed return to investors who track it

Explanation

An index is a statistical measure that tracks the relative change in value of a defined basket of securities against a base value, allowing users to judge overall market direction. It is a measurement tool, not a product that promises returns, and it does not record dividends or represent one company alone.

Question 22Indices

In a market capitalisation weighted index, a company's weight is determined mainly by its:

  1. dividend yield relative to peers
  2. number of shareholders on the register
  3. share price multiplied by the number of shares outstanding Correct answer.
  4. trading volume over the last month

Explanation

Market capitalisation weighting assigns each constituent a weight proportional to price times shares outstanding, so larger companies dominate the index. Volume, shareholder count and dividend yield do not set the weights in a pure cap-weighted index.

Question 23Indices

The Nifty 50 index is composed of securities listed on which exchange?

  1. National Stock Exchange of India Correct answer.
  2. Bombay Stock Exchange
  3. New York Stock Exchange
  4. London Stock Exchange

Explanation

The Nifty 50 is the flagship benchmark index of the National Stock Exchange of India, tracking 50 large, liquid Indian companies. The Sensex is the comparable benchmark of the Bombay Stock Exchange.

Question 24Indices

A free-float adjusted index excludes which shares from a company's weighting?

  1. Shares traded on the exchange in the last year
  2. Shares held by retail investors
  3. Shares held by promoters, government and strategic holders not freely tradeable Correct answer.
  4. Shares held by domestic mutual funds

Explanation

Free-float methodology counts only shares available for public trading, so promoter, government and other strategic lock-in holdings are excluded. Retail, mutual fund and actively traded shares are part of the free float.

Question 25Indices

Which of the following is a sectoral index?

  1. Nifty 50
  2. Nifty Next 50
  3. Nifty Bank Correct answer.
  4. Nifty Midcap 150

Explanation

A sectoral index tracks companies from one industry, and Nifty Bank covers only banking stocks. The other three are broad-market indices spanning multiple sectors.

Question 26Indices

The base value of an index is significant because it:

  1. determines the number of constituents permanently
  2. provides the reference level against which later index values are compared Correct answer.
  3. sets the maximum level the index can reach
  4. fixes the dividend paid by constituents

Explanation

The base value is the starting level assigned to the basket at the base date, so current index values express percentage change relative to it. It does not cap the index, fix dividends or lock the constituent count.

Question 27Indices

An index fund aims to replicate the performance of a benchmark index by:

  1. guaranteeing a return equal to the index plus one percent
  2. investing only in government bonds
  3. holding the constituent securities in weights that mirror the index Correct answer.
  4. actively selecting undervalued stocks to beat the index

Explanation

A passive index fund buys the constituents in proportion to their index weights so its returns track the benchmark before costs. Active stock picking, bond-only portfolios and return guarantees describe other strategies, not index replication.

Question 28Indices

A price-return index differs from a total-return index because the price-return version:

  1. ignores dividends paid by constituents Correct answer.
  2. adds dividends back into the index level
  3. includes only bond coupons
  4. is recalculated only once a year

Explanation

A price-return index reflects only price movements, so cash dividends are not added back. A total-return index reinvests dividends, giving a higher cumulative return over time.

Question 29Indices

Index A has a value of 5,000 today and stood at 4,000 one year ago. What is the approximate one-year percentage change?

  1. 10 percent
  2. 25 percent Correct answer.
  3. 125 percent
  4. 20 percent

Explanation

The change is (5,000 minus 4,000) divided by 4,000, which equals 0.25, or 25 percent. Dividing by the starting value is essential; using the ending value gives a different, incorrect figure.

Question 30Indices

When a constituent of a cap-weighted index issues bonus shares, the index provider adjusts the divisor so that:

  1. the index level is unaffected by the change in share count Correct answer.
  2. the index level falls by the bonus ratio
  3. the base value is reset to zero
  4. the constituent is removed from the index

Explanation

A bonus issue changes the number of shares but not the economic value of the company, so the divisor is adjusted to keep the index level continuous. Without the adjustment the index would show an artificial jump or drop.

Question 31Indices

The main purpose of periodic index rebalancing is to:

  1. ensure the index continues to represent its stated selection criteria Correct answer.
  2. increase the number of constituents every year
  3. reduce the index value to its base level
  4. maximise the dividend income of the index

Explanation

Rebalancing reviews constituents so the index keeps matching its defined universe, size and liquidity rules as companies grow, shrink or delist. It is not aimed at raising constituent counts, boosting dividends or resetting the level.

Question 32Indices

An investor wants broad exposure to Indian large-cap equities through a single instrument. Which index is the most direct benchmark for that exposure?

  1. Nifty 10-year G-sec index
  2. Nifty 50 Correct answer.
  3. India VIX
  4. Nifty Bank

Explanation

Nifty 50 represents large, liquid Indian companies across sectors, making it the standard broad large-cap benchmark. Nifty Bank is sector-specific, India VIX measures expected volatility and the G-sec index tracks bonds.

Question 33Indices

If a cap-weighted index has three stocks with market caps of 100, 200 and 700, the weight of the largest stock is:

  1. 10 percent
  2. 20 percent
  3. 50 percent
  4. 70 percent Correct answer.

Explanation

Total market cap is 1,000, so the largest stock at 700 carries a weight of 700 divided by 1,000, or 70 percent. Weights are proportional to each stock's market cap relative to the total.

Question 34Indices

An equal-weighted index differs from a cap-weighted index in that it:

  1. always outperforms the cap-weighted version
  2. weights constituents by their trading volume
  3. gives every constituent the same weight at each rebalancing Correct answer.
  4. excludes small companies entirely

Explanation

An equal-weighted index assigns identical weights to all constituents and rebalances periodically to restore equality. Cap weighting instead favours larger companies, and neither method guarantees superior performance.

Question 35Indices

A tracking error of an index fund measures the:

  1. standard deviation of the difference between fund and index returns Correct answer.
  2. total expense ratio charged by the fund
  3. dividend yield of the benchmark
  4. number of constituents the fund holds

Explanation

Tracking error quantifies how closely a fund follows its benchmark by measuring the volatility of the return difference. Expense ratio, holdings count and yield are separate attributes that do not define tracking error.

Question 36Indices

An index provider announces that a stock will be added to a widely tracked index. Which effect is most likely around the effective date?

  1. The stock is immediately delisted from the exchange
  2. The index base value is revised upward
  3. The company's dividend is cancelled
  4. Index funds buy the stock, creating temporary demand pressure Correct answer.

Explanation

Passive funds replicating the index must buy the new constituent to match weights, which can create short-term demand and price pressure. Inclusion does not delist a stock, cancel dividends or change the base value.

Question 37Indices

A stock in a cap-weighted index rises sharply while all other constituents are unchanged. The index level will:

  1. stay unchanged because other stocks did not move
  2. rise by the same percentage as the stock regardless of weight
  3. fall because the divisor must be reduced
  4. rise, with the size of the move proportional to that stock's weight Correct answer.

Explanation

An index is a weighted average, so a single stock's move affects the index in proportion to its weight. A small constituent moving sharply shifts the index far less than a large one would.

Question 38Indices

Why do index providers apply a liquidity screen when selecting constituents?

  1. To guarantee that constituent prices always rise
  2. To keep the number of shareholders constant
  3. To ensure the index remains investable and replicable by funds Correct answer.
  4. To eliminate all small-cap companies from every index

Explanation

Liquidity criteria such as minimum trading volume ensure that funds tracking the index can buy and sell constituents without excessive market impact. Screens do not guarantee price gains, fix shareholder counts or automatically exclude all small caps.

Question 39Indices

An investor compares two funds tracking the same index. Fund X has a lower expense ratio but higher tracking error than Fund Y. Which interpretation is most sound?

  1. Fund X is guaranteed to outperform Fund Y
  2. Fund Y must hold fewer constituents
  3. Fund X is cheaper but replicates the benchmark less consistently Correct answer.
  4. Both funds will have identical returns by definition

Explanation

Expense ratio and tracking error capture different things: cost versus closeness of replication. A cheaper fund with higher tracking error may deviate more from the benchmark, so neither attribute alone determines relative performance.

Question 40Indices

Which statement about the India VIX is correct?

  1. It tracks the price of the 50 largest stocks directly
  2. It reflects the market's expected volatility over the near term Correct answer.
  3. It is a total-return equity index
  4. It measures the yield on government bonds

Explanation

India VIX is a volatility index derived from option prices and indicates expected near-term market volatility. It is not a price index of large stocks, a total-return index or a bond yield measure.

Question 41Emerge Platform (SME)

On the NSE Emerge (SME) platform, what does the 'SME' designation primarily indicate about a listed company?

  1. It is a small or medium enterprise raising capital through a dedicated SME segment Correct answer.
  2. It is a subsidiary of a large-cap index constituent
  3. It is a company restricted to institutional investors only
  4. It is a company whose shares trade only in the debt market

Explanation

The SME platform exists so that smaller enterprises can access public equity capital with a lighter regulatory framework than the main board. Listing there identifies the issuer as an SME rather than a large-cap main-board company. It does not by itself restrict the investor base or place the shares in the debt segment.

Question 42Emerge Platform (SME)

Which regulator administers the framework under which SME companies list and trade on the NSE Emerge platform?

  1. Ministry of Corporate Affairs
  2. Reserve Bank of India
  3. Securities and Exchange Board of India Correct answer.
  4. Insurance Regulatory and Development Authority of India

Explanation

SEBI is the securities market regulator and issues the ICDR and LODR regulations that govern SME public issues and post-listing obligations. The RBI handles monetary and banking regulation, IRDAI regulates insurers, and the MCA administers company law. Listing and trading rules therefore sit with SEBI.

Question 43Emerge Platform (SME)

A company wants to list on NSE Emerge. Which document is the primary disclosure document it must prepare for its SME initial public offering?

  1. A scheme of arrangement approved by the tribunal
  2. An abridged annual report circulated to shareholders
  3. A draft prospectus filed with the exchange for public comments Correct answer.
  4. A red herring prospectus filed with SEBI and the exchange

Explanation

SME issuers file a draft prospectus with the recognised stock exchange, which hosts it for public comments before the issue opens. The main-board route involves filing a red herring prospectus with SEBI as well, which is not the SME process. Annual reports and schemes of arrangement serve entirely different corporate purposes.

Question 44Emerge Platform (SME)

Under the SME framework, which entity is responsible for granting in-principle approval before an SME issue opens on NSE Emerge?

  1. The recognised stock exchange where the SME segment operates Correct answer.
  2. The lead bank of the issuer
  3. The credit rating agency
  4. The registrar to the issue

Explanation

The recognised stock exchange operating the SME segment reviews the draft prospectus and grants in-principle approval for listing before the issue opens. The lead bank, registrar, and rating agency perform operational or assessment roles but do not authorise the listing. Approval authority rests with the exchange under the SME framework.

Question 45Emerge Platform (SME)

What is the typical minimum application lot size requirement for a retail investor in an SME IPO on NSE Emerge?

  1. A fixed lot of at least the minimum application value prescribed for SME issues Correct answer.
  2. Exactly 500 shares in every SME issue
  3. One share, identical to main-board issues
  4. A lot determined solely by the investor's broker

Explanation

SME issues set a minimum application value and the investor must apply in lots whose value meets that threshold, so the share count varies by issue price. Main-board issues commonly permit a single-share application, which does not apply here. Neither a flat 500-share rule nor broker discretion determines the lot.

Question 46Emerge Platform (SME)

Which market-making arrangement is associated with SME platforms to support liquidity in listed SME scrips?

  1. A daily circuit filter removal by the exchange
  2. A designated market maker obligated to provide two-way quotes for a period Correct answer.
  3. A fixed-price trading window open only to promoters
  4. A compulsory buyback programme every quarter

Explanation

SME platforms require a market-making arrangement in which a designated market maker offers continuous two-way quotes for a specified period after listing. This addresses the thin liquidity typical of small issues. Quarterly buybacks, circuit removal, and promoter-only windows are not the liquidity mechanism used.

Question 47Emerge Platform (SME)

An SME company listed on NSE Emerge is migrating to the NSE main board. What is the most direct consequence for investors?

  1. The shares are automatically delisted from all exchanges
  2. The company must repay its IPO proceeds to shareholders
  3. The scrip becomes subject to main-board eligibility and disclosure norms Correct answer.
  4. The promoter holding is compulsorily reduced to zero

Explanation

Migration to the main board means the company must satisfy main-board eligibility criteria and comply with the corresponding disclosure and governance requirements. It does not trigger automatic delisting, repayment of issue proceeds, or elimination of promoter holdings. Investors simply hold a main-board scrip after the shift.

Question 48Emerge Platform (SME)

Why does the SME framework rely on exchange-level scrutiny of the draft prospectus rather than full SEBI filing?

  1. To prevent institutional investors from participating
  2. To shift all liability for disclosure onto retail investors
  3. To exempt SME issuers from any disclosure obligations
  4. To reduce time and cost of fund-raising for smaller issuers while retaining disclosure Correct answer.

Explanation

The SME route streamlines the process so smaller companies can raise funds faster and at lower cost, with the exchange performing the review role. Disclosure obligations still apply, and liability is not transferred to investors. Institutional participation is not prohibited by the framework.

Question 49Emerge Platform (SME)

Which risk is most characteristic of investing in SME scrips on NSE Emerge compared with large-cap main-board stocks?

  1. Lower liquidity and higher price volatility Correct answer.
  2. Guaranteed price stability due to the market maker
  3. Exemption from all insider trading rules
  4. Assured dividend payment every year

Explanation

SME scrips typically have smaller free floats and thinner trading volumes, which can produce wider price swings and harder exits. Market making supports but does not guarantee stable prices. Insider trading rules and dividend discretion apply as they do elsewhere.

Question 50Emerge Platform (SME)

In an SME IPO on NSE Emerge, which category of investors is typically allocated a specified portion under the issue structure?

  1. Only qualified institutional buyers
  2. Retail individual investors and non-institutional investors among others Correct answer.
  3. Only foreign portfolio investors
  4. Only the issuer's employees

Explanation

SME issue structures reserve portions for retail individual investors and non-institutional investors, alongside any other categories specified in the offer document. Allocations are not confined to FPIs, employees, or QIBs alone. The categories follow the disclosed issue structure.