NISM Series XII (SMF) cheat sheet

A security is a transferable financial instrument carrying a claim on the issuer or on a pool of assets; examples include equity shares, debentures, bonds, units of mutual funds, and derivatives.

Primary market: the issuer raises capital by issuing new securities (IPO for unlisted companies, FPO for listed issuers, rights issue to existing shareholders, preferential allotment, QIP for listed companies to qualified institutional buyers).

Secondary market: investors trade already-issued securities; the issuer receives no proceeds. Provides liquidity and price discovery through exchanges and OTC platforms.

SEBI is the statutory regulator under the SEBI Act, 1992; its mandate covers investor protection, market development, and regulation of intermediaries, exchanges, and collective investment schemes.

RBI regulates money markets, government securities, and foreign exchange; the Ministry of Corporate Affairs administers the Companies Act, 2013; IRDAI and PFRDA regulate insurance and pensions respectively.

Market participants: issuers, investors (retail, HNI, institutional), intermediaries (merchant bankers, brokers, depository participants, custodians, registrars), and market infrastructure institutions (exchanges, clearing corporations, depositories).

Order types on Indian exchanges: market order (executes at best available price), limit order (executes at the specified price or better), stop-loss order (triggered when a threshold price is reached); validity options include DAY and IOC.

Settlement in Indian equity markets follows the T+1 rolling settlement cycle; pay-in and pay-out of funds and securities occur on the next trading day after the trade.

Price bands and circuit limits: scrips are subject to daily price bands (commonly 2%, 5%, 10%, or 20%); hitting the band halts trading in that direction for the remainder of the session or for a defined cooling period.

Depositories hold securities in electronic (dematerialised) form; NSDL and CDSL are the two Indian depositories. A depository participant (DP) opens the demat account for the investor.

Clearing corporations novate trades, act as central counterparty, and guarantee settlement; in India the principal ones are NSE Clearing, Indian Clearing Corporation, and MCX Clearing.

A stock exchange must be recognised by SEBI under the Securities Contracts (Regulation) Act, 1956; recognised exchanges include NSE, BSE, MSEI, and commodity exchanges such as MCX and NCDEX.

Money market instruments (maturity up to one year) include treasury bills, commercial paper, certificates of deposit, and call/notice money; capital market instruments have maturities above one year.

Derivatives are contracts whose value derives from an underlying (index, stock, commodity, currency); common types are forwards, futures, options, and swaps. Indian exchange-traded derivatives are cash-settled for index and stock futures/options.

Mutual fund units are issued at NAV plus applicable load; open-ended schemes allow continuous redemption at NAV, while close-ended schemes have a fixed maturity and are listed for trading.

Insider trading is prohibited under SEBI (Prohibition of Insider Trading) Regulations, 2015; designated persons and their immediate relatives are subject to trading-window and disclosure requirements.

SEBI (Intermediaries) Regulations, 2008 govern registration and conduct of market intermediaries; registration categories include stock brokers, merchant bankers, portfolio managers, and investment advisers.

KYC is mandatory for all investors; PAN is the primary identifier, and Aadhaar-based e-KYC is permitted for individual accounts subject to the applicable limits.

Investor grievance redressal: SEBI SCORES is the online complaint platform; complaints are first escalated to the intermediary, then to SEBI if unresolved within the prescribed period.

The Investor Protection Fund (IPF) at each exchange compensates investors for specified defaults by members, subject to per-claim and per-investor caps set by the exchange.

Under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003, manipulative devices such as circular trading, price rigging, and misleading statements are prohibited.

A broker must segregate client funds and securities from its own; client securities are held in the client's demat account, not in the broker's pool account, except for settlement obligations.

Risk disclosure: derivatives and leveraged products carry substantial risk of loss; the client must sign a risk disclosure document and a rights-and-obligations document before trading.

Market capitalisation = current share price × number of outstanding shares. It is used to classify companies into large-cap, mid-cap, and small-cap buckets.

Free-float market capitalisation excludes shares held by promoters and strategic holders; NSE indices such as the Nifty 50 are computed on free-float market capitalisation.

Price-to-earnings (P/E) ratio = market price per share ÷ earnings per share (EPS). EPS = net profit attributable to equity shareholders ÷ weighted average number of equity shares.

Dividend yield = annual dividend per share ÷ market price per share, expressed as a percentage.

Book value per share = (total shareholders' equity − preference share capital) ÷ number of equity shares outstanding.

A bond's price moves inversely to yield; yield to maturity (YTM) is the discount rate equating the present value of future coupons and principal to the current price.

Index return over a period = (closing index level − opening index level) ÷ opening index level × 100%. Total return adds dividends received during the period.

Turnover (in value) = number of shares traded × trade price; market breadth measures the ratio of advancing to declining scrips and signals the direction of the broader market.

Margin trading facility (MTF) allows a client to buy securities by paying a part of the value; the broker funds the balance against pledged securities, subject to SEBI-prescribed initial margin and maintenance requirements.

Intraday (MIS) positions must be squared off before market close; delivery (CNC) positions result in securities credited to the demat account on T+1 pay-out.

Circuit breaker at the index level: a 10% movement triggers a 15-minute halt, 15% a 30-minute halt, and 20% a halt for the rest of the day, with timing rules depending on when the trigger occurs.

Corporate actions affecting price: a bonus issue increases share count without changing shareholder wealth; a stock split divides face value; a rights issue offers existing holders the right to subscribe at a discount; dividends reduce the ex-dividend price.

Ex-date and record date: the ex-date is the first trading day on which the buyer is not entitled to the corporate action; the record date is the date on which the company fixes eligible holders.

Trading in securities must occur on a recognised stock exchange or through a SEBI-approved platform; off-market transfers are executed via delivery instruction slips (DIS) through the DP.

A contract note is issued by the broker within 24 hours of trade execution and must show the trade details, brokerage, taxes (STT, GST, stamp duty), and net obligation.

Securities Transaction Tax (STT) is levied on the value of taxable securities transactions: on delivery-based equity purchases and sales, on intraday equity sales, and on derivatives (options premium and futures sale value).

Brokerage is negotiable between client and broker but must be disclosed in the tariff sheet; GST applies to brokerage and transaction charges; stamp duty is levied on the buy side of delivery trades.

Dematerialisation converts physical certificates into electronic form; rematerialisation reverses it. A demat account requires a PAN, KYC documents, and a nomination (optional but recommended).

A trading account is used to place orders; a demat account holds securities; a bank account funds settlement. All three must be linked for smooth pay-in and pay-out.

Margin requirements: initial margin (SPAN + exposure margin for derivatives) is collected upfront; mark-to-market losses are settled daily; failure to meet margin leads to square-off and penalty.

Arbitrage is the simultaneous purchase and sale of the same or equivalent security in different markets to profit from price differences; it enforces the law of one price across venues.

Portfolio diversification reduces unsystematic (company-specific) risk but does not eliminate systematic (market) risk, which affects all securities.

SEBI (Stock Brokers) Regulations, 1992 prescribe registration, capital adequacy, margin collection, and record-keeping obligations for stock brokers and sub-brokers (now authorised persons).

Under the SEBI (Portfolio Managers) Regulations, 2020, a portfolio manager manages a client's securities portfolio for a fee; the minimum investment per client is INR 50 lakh.

SEBI (Investment Advisers) Regulations, 2013 require registration for persons giving investment advice for consideration; advisers must disclose conflicts and follow suitability norms.

The Securities Appellate Tribunal (SAT) hears appeals against SEBI orders; further appeal lies to the Supreme Court. SAT is a statutory body under the SEBI Act.

A collective investment scheme (CIS) pools money from investors and is regulated by SEBI under the SEBI Act; unregistered CIS schemes are illegal.

Market abuse includes insider trading and market manipulation; SEBI can impose penalties, disgorgement of unlawful gains, and debarment from the securities market.

A 'fit and proper person' criterion applies to directors and key personnel of intermediaries, assessed on integrity, reputation, financial soundness, and absence of regulatory disqualification.

NAV (Net Asset Value) = (total assets − total liabilities) ÷ number of units outstanding; it is computed daily for open-ended schemes.

SEBI (Mutual Funds) Regulations, 1996 govern fund registration, scheme categorisation, expense ratios, and disclosures; the sponsor, trustee, and asset management company (AMC) are distinct entities.

Scheme categories include equity, debt, hybrid, index, ETF, and solution-oriented schemes; equity schemes must hold at least 65% in equity and equity-related instruments.

Total expense ratio (TER) is capped by SEBI and includes the investment management fee, administrative expenses, and distribution costs; direct plans have a lower TER than regular plans because they exclude distributor commission.

Entry and exit loads are permitted within SEBI limits; exit load discourages early redemption and is credited back to the scheme's assets.

A mutual fund is a pass-through vehicle: income and gains are distributed or reinvested, and the investor bears the market risk of the underlying portfolio.

Systematic Investment Plan (SIP) invests a fixed amount at regular intervals, averaging purchase cost over time; Systematic Withdrawal Plan (SWP) redeems units periodically.

Exchange-traded funds (ETFs) are open-ended schemes listed on an exchange; units trade intraday at market prices that may deviate from NAV, creating a premium or discount.

Authorised participants (APs) create and redeem ETF units in large lots, arbitraging the premium/discount and keeping the market price close to NAV.

REITs and InvITs are SEBI-regulated vehicles that pool income-producing real estate or infrastructure assets; units are listed and traded like equity shares.

REITs must distribute at least 90% of net distributable cash flows to unitholders; they offer liquidity compared with direct real estate investment.

Sovereign Gold Bonds (SGBs) are issued by RBI on behalf of the Government of India, carry a fixed interest, and are redeemable at maturity linked to the gold price.

Bonds are rated by credit rating agencies (CRISIL, ICRA, CARE, India Ratings); a downgrade raises the yield demanded by investors and lowers the bond price.

Preference shares carry a fixed dividend and priority over equity on liquidation but typically lack voting rights; they are a hybrid instrument between debt and equity.

An exchange must maintain a surveillance function to detect price manipulation, insider trading, and abnormal trading patterns; SEBI conducts integrated market surveillance across exchanges.

Grading of exchanges by SEBI is based on parameters including market structure, disclosure, and investor protection; grading is not a guarantee of exchange performance.

Trading halts and suspension of scrips occur when disclosure requirements are not met or when surveillance detects irregularities.

Settlement guarantee funds (SGF) at clearing corporations protect against counterparty default; they are funded by members' contributions and exchange reserves.

The 'T+1' cycle applies to equities; T+0 settlement (same-day) has been introduced on an optional basis for a limited set of scrips, with T+1 continuing as the standard.

Auction and close-out: when a seller fails to deliver securities, the exchange conducts an auction to buy the securities from the market and the defaulting member bears the cost plus penalty.

Investor education and awareness are mandated functions of SEBI and exchanges; the National Institute of Securities Markets (NISM) is an SEBI institution that conducts certification examinations.

Return on equity (ROE) = net income ÷ average shareholders' equity; it measures the return generated on owners' capital.

Return on assets (ROA) = net income ÷ average total assets; it measures how efficiently assets generate profit, independent of financing mix.

Debt-to-equity ratio = total debt ÷ total shareholders' equity; a higher ratio indicates greater financial leverage and higher financial risk.

Current ratio = current assets ÷ current liabilities; a ratio below 1 signals potential short-term liquidity stress.

Interest coverage ratio = earnings before interest and tax (EBIT) ÷ interest expense; it measures the ability to service debt from operating earnings.

Dividend payout ratio = dividends declared per share ÷ earnings per share; the retention ratio = 1 − payout ratio.

Net asset value per unit of a fund = (market value of investments + receivables − liabilities) ÷ units outstanding; it is the price at which open-ended units are bought and sold.

Account opening: the client submits KYC (PAN, address proof, photograph, bank details), completes in-person verification (IPV), and signs the rights-and-obligations document and tariff sheet.

Unique Client Code (UCC) is assigned by the broker to each client; all orders must carry the UCC so trades can be mapped to the correct client.

Order lifecycle: order entry → risk check (margin, price band, quantity) → routing to exchange → matching → trade confirmation → clearing → settlement.

Order validity options include DAY, IOC (immediate or cancel), and GTC (good till cancelled, where supported); a limit order may remain unexecuted if the market does not reach the specified price.

Modification and cancellation of orders are permitted before execution; once matched, a trade cannot be cancelled and must be settled.

The broker must issue a contract note within 24 hours of trade execution and a statement of account (holding statement) at least once a month, or quarterly if no transactions occurred.

Client funds must be returned within one working day of a request; running accounts and settlement obligations must reconcile with the client's ledger.

Systemic risk is the risk that the failure of one participant or market segment cascades through the financial system; central counterparties and margin systems are designed to contain it.

Counterparty risk is the risk that the other side of a trade defaults; clearing corporations mitigate it through novation, margin, and the settlement guarantee fund.

Liquidity risk has two forms: market liquidity risk (inability to trade at a fair price) and funding liquidity risk (inability to meet cash obligations).

Operational risk arises from failed internal processes, people, systems, or external events; SEBI mandates business continuity and disaster recovery for market infrastructure institutions.

Concentration risk arises when a portfolio or an intermediary's exposure is concentrated in a few counterparties or securities; exposure limits are prescribed to cap it.

A 'circuit breaker' at the market level halts trading to allow information dissemination and prevent panic; index-level triggers are set by SEBI and implemented by exchanges.

Regulatory arbitrage occurs when participants exploit differences in rules across jurisdictions or segments; SEBI addresses it through harmonised norms across exchanges and products.

Bull market: a sustained period of rising prices; bear market: a sustained period of falling prices, typically a decline of 20% or more from recent highs.

Blue chip: a large, well-established, financially sound company with a long record of stable earnings and dividend payments.

IPO (initial public offering): the first sale of equity shares by a company to the public, accompanied by a prospectus and SEBI-mandated disclosures.

Book building: a price-discovery process in which investors bid within a price band; the final issue price is determined by demand.

Grey market: unofficial trading in securities before listing; it is not recognised by SEBI and carries settlement risk.

Short selling: selling securities not owned, with the intention of buying them back at a lower price; in India, short selling is permitted in the cash segment only on an intraday basis (no naked short delivery).

Haircut: a reduction applied to the value of collateral when computing margin, reflecting the collateral's price volatility and liquidity.

A demat account holds securities in fungible electronic form; the DP acts as an agent of the depository and must be registered with SEBI.

Dematerialisation request form (DRF) is submitted to the DP along with physical certificates; the registrar verifies and the depository credits the electronic balance.

Delivery instruction slip (DIS) is used to transfer securities from one demat account to another; it can be executed on a 'free' basis (off-market) or against a trade.

Settlement obligation: on T+1, the buyer pays funds and the seller delivers securities; the clearing corporation nets obligations across members and instructs the depositories.

Pay-in and pay-out: pay-in is the transfer of funds/securities to the clearing corporation; pay-out is the transfer from the clearing corporation to the buyer/seller.

Pledge and hypothecation: securities can be pledged in favour of a lender (e.g., for margin funding) through the depository system; the pledgee can invoke the pledge on default.

Corporate action entitlement follows the record date; the exchange fixes the ex-date so that trades on or after that date do not carry the entitlement.

A futures contract obligates both parties to buy or sell an underlying at a predetermined price on a future date; it is standardised and exchange-traded.

An option gives the buyer a right, not an obligation, to buy (call) or sell (put) the underlying at the strike price before or on expiry; the buyer pays a premium.

Payoff of a long call at expiry = max(0, spot price − strike price) − premium paid; payoff of a long put = max(0, strike price − spot price) − premium paid.

Hedging uses derivatives to offset price risk in the underlying; speculation takes a position to profit from expected price moves; arbitrage exploits mispricing between markets.

Open interest is the number of outstanding derivative contracts; a rise in open interest with rising prices suggests a strengthening trend.

Implied volatility is the volatility embedded in an option's market price; higher implied volatility raises option premiums, all else equal.

In India, index derivatives are cash-settled, while stock derivatives are physically settled on expiry; contract specifications are set by the exchange with SEBI approval.

Know Your Client (KYC) and anti-money-laundering (AML) obligations require intermediaries to verify identity, monitor transactions, and report suspicious transactions to FIU-IND.

Client confidentiality: an intermediary may not disclose client information except as required by law, regulation, or with client consent.

Suitability: an intermediary must assess the client's risk profile and recommend products consistent with the client's objectives and constraints.

Conflicts of interest must be disclosed and managed; front-running (trading ahead of a client order) is prohibited.

Record-keeping: intermediaries must maintain records of client orders, trades, and communications for the period prescribed by SEBI (generally five years).

Grievance redressal: the intermediary must designate a compliance officer and resolve complaints within the prescribed timeline; unresolved complaints escalate to SEBI SCORES.

Code of conduct under the SEBI (Intermediaries) Regulations requires fair dealing, diligence, and avoidance of misleading advertisements.

Interest rate changes affect equity valuations: rising rates raise the discount rate, typically compressing equity valuations, and lower bond prices.

Inflation erodes real returns; central banks respond by adjusting policy rates, which influence bond yields and equity risk premia.

Foreign portfolio investment (FPI) flows affect Indian markets: inflows support the rupee and equity prices; outflows can pressure both.

Currency movements affect exporters and importers differently; a weaker rupee benefits exporters and hurts importers, all else equal.

The yield curve plots yields against maturities; an inverted curve (short rates above long rates) is often interpreted as a signal of expected economic slowdown.

Market indices serve as benchmarks for performance evaluation and as underlyings for derivatives; index construction methodology affects sector weights and returns.

Correlation measures how two securities move together; diversification benefits are greater when correlations are low or negative.

Primary market issuance does not involve the exchange as a counterparty; the issuer receives proceeds, and the exchange merely lists the securities.

SEBI does not guarantee returns on any security or scheme; it regulates disclosure and conduct, not investment outcomes.

A stock broker's registration is granted by SEBI, but the broker is a member of an exchange; the exchange's membership is separate from SEBI registration.

The depository holds securities; the depository participant is the investor-facing intermediary; the registrar and transfer agent (RTA) maintains the issuer's register.

A mutual fund scheme's NAV is not the same as its market price; for listed closed-ended schemes and ETFs, market price can differ from NAV.

STT is levied on the transaction value, not on profit; it is collected by the exchange and remitted to the government.

Trading on unpublished price-sensitive information (UPSI) is prohibited; UPSI includes information that, if disclosed, would materially affect the security's price.

Brokerage on a trade = trade value × brokerage rate; add GST on brokerage and transaction charges, STT, stamp duty (on buy), and SEBI turnover fees to obtain total cost.

Net profit on a delivery trade = (sale price − purchase price) × quantity − total costs (brokerage, taxes, and charges on both legs).

Return on investment = (final value − initial investment + income received) ÷ initial investment × 100%.

Compound annual growth rate (CAGR) = (ending value ÷ beginning value)^(1 ÷ number of years) − 1.

Margin percentage = margin amount ÷ trade value × 100%; leverage = trade value ÷ margin amount.

Break-even price for a long position = purchase price + total transaction costs per share.

Yield to maturity approximation = (annual coupon + (face value − price) ÷ years to maturity) ÷ ((face value + price) ÷ 2).

BSE, established in 1875, is Asia's oldest stock exchange; NSE was incorporated in 1992 and introduced screen-based trading and the Nifty 50 index.

SEBI was constituted in 1988 as an administrative body and given statutory powers by the SEBI Act, 1992, following the Harshad Mehta securities scam.

The Depositories Act, 1996 enabled electronic holding of securities; NSDL was the first depository (1996), followed by CDSL (1999).

The National Stock Exchange introduced the Nifty 50 index in 1996; it is computed on free-float market capitalisation and rebalanced periodically.

The Companies Act, 2013 replaced the Companies Act, 1956 and governs incorporation, share issuance, and corporate governance for companies.

The Securities Contracts (Regulation) Act, 1956 defines 'securities' and provides for recognition and regulation of stock exchanges.

NISM, established by SEBI, develops certification examinations and continuing education for securities market professionals.

Merchant bankers manage public issues, due diligence, and underwriting; they must be registered with SEBI under the Merchant Bankers Regulations, 1992.

Registrar and transfer agents (RTAs) maintain the register of members, process allotments, and handle corporate actions for issuers.

Custodians hold securities on behalf of institutional clients and handle settlement, corporate actions, and reporting; they are SEBI-registered.

Debenture trustees protect the interests of debenture holders and monitor compliance with the trust deed; they are registered with SEBI.

Credit rating agencies assign ratings to debt instruments; SEBI regulates them under the Credit Rating Agencies Regulations, 1999.

Portfolio managers and investment advisers provide discretionary and advisory services respectively; their registration and conduct requirements differ.

Authorised persons (formerly sub-brokers) act on behalf of a stock broker and must be registered with the exchange and authorised by SEBI.

Value at Risk (VaR) estimates the maximum expected loss over a given horizon at a specified confidence level; it is used to set margin requirements.

SPAN (Standard Portfolio Analysis of Risk) margin is computed by the clearing corporation based on the risk of the portfolio of positions, not on individual positions alone.

Exposure margin is an additional margin levied on derivative positions to cover risks not captured by SPAN.

Mark-to-market (MTM) settlement: daily profits and losses on futures positions are credited or debited to the member's account.

Peak margin is the higher of the margin computed at the time of trade and the margin at the end of the day; it is collected to prevent intraday leverage.

Margin collection must be done on an upfront basis from clients; failure to collect margin from clients attracts penalties on the broker.

Stress testing and scenario analysis supplement VaR by estimating losses under extreme but plausible market conditions.

An equity shareholder has the right to vote, receive dividends when declared, and participate in rights issues and bonus issues on a pro-rata basis.

A debenture holder is a creditor of the company and has a right to receive interest and principal as per the terms of the issue; debenture holders do not vote in shareholder meetings.

A client has the right to receive a contract note, statement of account, and a copy of the tariff sheet; the client has the obligation to pay margins and settle dues.

The client may nominate a person to receive securities in the demat account on death; nomination is optional but simplifies transmission.

Transmission of securities on death requires a death certificate, succession certificate or probate (as applicable), and KYC of the nominee or legal heir.

The client has the right to close the account at any time; the broker must settle the account and return securities and funds within the prescribed period.

Investors can check broker registration on the SEBI website and verify the unique client code and contract notes against exchange records.

Distinguish 'issue' (primary market) from 'trade' (secondary market); only issues raise fresh capital for the issuer.

Distinguish 'price' (market-determined) from 'NAV' (computed from underlying assets); for open-ended funds, transactions occur at NAV, not at market price.

Distinguish 'margin' (collateral for a position) from 'premium' (price paid for an option); both are upfront payments but serve different purposes.

Distinguish 'ex-date' from 'record date'; the ex-date is set by the exchange and the record date by the company, and the two are usually the same or one day apart.

Distinguish 'dematerialisation' (physical to electronic) from 'rematerialisation' (electronic to physical); both are investor-initiated through the DP.

Distinguish 'SEBI registration' from 'exchange membership'; a broker needs both to operate, and the two are granted by different bodies.

Distinguish 'systematic risk' (market-wide, non-diversifiable) from 'unsystematic risk' (security-specific, diversifiable).