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Series VII · Practice Set 1

NISM Series VII: Securities Operations and Risk Management Certification — Practice Set 1 Practice Questions

Original practice set for NISM Series VII: Securities Operations and Risk Management Certification. Every question below shows the correct answer and a full explanation, so you can read through this set as a study page or attempt it as a timed mock test.

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Practice questions

All 35 questions in Practice Set 1

Read each question, think through your answer, then expand it to check the correct option and explanation.

Securities Markets

Q1. The primary market in securities refers to:

  1. A. The biggest stock exchange
  2. B. Where new securities are issued to investors for the first time (IPOs, rights issues, NFOs)
  3. C. Where old shares are traded
  4. D. The government bond market only
Show correct answer & explanation

Correct answer: B. Where new securities are issued to investors for the first time (IPOs, rights issues, NFOs)

The primary market is where securities are issued for the first time. Companies raise capital through IPOs, rights issues, and private placements. Investors buy directly from the issuer. Money flows to the company.
Securities Markets

Q2. The secondary market is where:

  1. A. Companies sell new shares
  2. B. Existing securities are bought and sold among investors through stock exchanges
  3. C. Mutual funds are created
  4. D. Banks lend to companies
Show correct answer & explanation

Correct answer: B. Existing securities are bought and sold among investors through stock exchanges

The secondary market (stock exchange) is where already-issued securities are traded among investors. Money flows between investors, not to the company. Examples include NSE, BSE for equity and F&O trading.
Trade Lifecycle

Q3. The correct sequence of the trade lifecycle is:

  1. A. Settlement → Clearing → Execution → Order
  2. B. Order → Execution → Clearing → Settlement
  3. C. Clearing → Order → Settlement → Execution
  4. D. Settlement → Execution → Order → Clearing
Show correct answer & explanation

Correct answer: B. Order → Execution → Clearing → Settlement

The trade lifecycle follows: (1) Order placement by client, (2) Execution on the exchange, (3) Clearing — determining obligations, (4) Settlement — actual exchange of securities and funds between buyer and seller.
Trade Lifecycle

Q4. A Market Order is:

  1. A. An order to buy/sell at a specified price only
  2. B. An order to buy/sell immediately at the best available current market price
  3. C. An order valid only for the day
  4. D. An order placed after market hours
Show correct answer & explanation

Correct answer: B. An order to buy/sell immediately at the best available current market price

A Market Order instructs the broker to execute the trade immediately at the best available price in the market. It guarantees execution but not the price. Suitable when speed of execution is more important than price.
Trade Lifecycle

Q5. A Limit Order is:

  1. A. An order to buy/sell at market price
  2. B. An order to buy at or below a specified price (or sell at or above a specified price) — price certainty but not execution certainty
  3. C. An order that expires at end of week
  4. D. An order that executes automatically at any price
Show correct answer & explanation

Correct answer: B. An order to buy at or below a specified price (or sell at or above a specified price) — price certainty but not execution certainty

A Limit Order specifies the maximum price for a buy order or minimum price for a sell order. It provides price certainty (will not execute at a worse price) but not execution certainty (may not execute if market doesn't reach the limit price).
Clearing and Settlement

Q6. The clearing corporation performs which key function?

  1. A. Executing trades on the exchange
  2. B. Determining net obligations of all trading members and guaranteeing settlement of all trades
  3. C. Regulating member brokers
  4. D. Setting daily stock price limits
Show correct answer & explanation

Correct answer: B. Determining net obligations of all trading members and guaranteeing settlement of all trades

The clearing corporation calculates net positions for all clearing members (netting buy and sell trades), determines money and securities obligations, acts as central counterparty guaranteeing settlement, and manages risk through margins.
Clearing and Settlement

Q7. Netting in clearing means:

  1. A. Catching fish in trading floors
  2. B. Offsetting buy and sell positions to determine net obligation — a member with 100 buy and 60 sell has net buy obligation of 40 shares
  3. C. Settling all trades gross (one by one)
  4. D. Cancelling trades
Show correct answer & explanation

Correct answer: B. Offsetting buy and sell positions to determine net obligation — a member with 100 buy and 60 sell has net buy obligation of 40 shares

Netting reduces settlement obligations. Instead of settling each trade separately, buy and sell positions are offset. A member who bought 100 and sold 60 of the same security needs to receive only 40 shares (or pay for 40 net).
Risk Management

Q8. Initial Margin in trading is collected to:

  1. A. Earn interest for the exchange
  2. B. Cover the potential loss on a position if prices move adversely before settlement
  3. C. Pay brokerage commissions
  4. D. Fund the clearing corporation's operations
Show correct answer & explanation

Correct answer: B. Cover the potential loss on a position if prices move adversely before settlement

Initial margin is collected upfront before allowing a trade, to cover the potential loss if prices move against the trader before the position is settled or squared off. It acts as security deposit and is calculated based on historical volatility.
Risk Management

Q9. Value at Risk (VaR) margin is based on:

  1. A. The face value of the security
  2. B. The maximum possible loss on a position at a given confidence level (e.g., 99%) over a specific period
  3. C. The book value of the company
  4. D. The company's credit rating
Show correct answer & explanation

Correct answer: B. The maximum possible loss on a position at a given confidence level (e.g., 99%) over a specific period

VaR margin is calculated as the maximum expected loss on a position at a specific confidence level (99%) over a defined period (1 day). Higher volatility securities have higher VaR margins. Used for setting margin requirements for equity positions.
Risk Management

Q10. MTM (Mark-to-Market) margin for futures positions is:

  1. A. Charged once at the beginning of a trade
  2. B. Daily settlement of unrealised gains and losses — debited for losses and credited for profits at end of each trading day
  3. C. Monthly settlement of profits
  4. D. Only for equity options, not futures
Show correct answer & explanation

Correct answer: B. Daily settlement of unrealised gains and losses — debited for losses and credited for profits at end of each trading day

MTM margin ensures daily settlement of unrealised P&L on futures positions. At end of each day, the position is marked to the settlement price. Losses are debited from the margin account, profits are credited. Prevents accumulation of large unrealised losses.
Back Office Operations

Q11. Contract note is a document issued by a broker to the client showing:

  1. A. Only total profit or loss
  2. B. Details of all trades executed including trade details, price, brokerage, STT, and other charges — legally binding document
  3. C. Only the stock price at close
  4. D. Only pending orders
Show correct answer & explanation

Correct answer: B. Details of all trades executed including trade details, price, brokerage, STT, and other charges — legally binding document

A contract note is a legally binding document issued by the broker to the client for every trading day. It contains details of all executed trades (security name, quantity, price, time) and all charges (brokerage, STT, exchange charges, GST).
Back Office Operations

Q12. Securities Transaction Tax (STT) is levied on:

  1. A. All mutual fund purchases
  2. B. Purchase and sale of listed equity shares, futures and options on stock exchanges in India
  3. C. Bank fixed deposits
  4. D. Government bonds only
Show correct answer & explanation

Correct answer: B. Purchase and sale of listed equity shares, futures and options on stock exchanges in India

STT (Securities Transaction Tax) is a tax levied on purchase and sale of listed equity shares, equity mutual fund units, and equity derivatives (futures and options) on recognised stock exchanges in India. It is collected by the exchange.
Trade Lifecycle

Q13. CTCL (Computer to Computer Link) in trading refers to:

  1. A. A type of internet connection
  2. B. A system allowing algorithmic trading — direct electronic connection between a trading member's computer systems and the exchange's trading engine
  3. C. A clearing system
  4. D. A communication protocol for back offices
Show correct answer & explanation

Correct answer: B. A system allowing algorithmic trading — direct electronic connection between a trading member's computer systems and the exchange's trading engine

CTCL refers to the Computer to Computer Link system that allows trading members to connect their own computer systems directly to the exchange's trading engine, enabling algorithmic and high-frequency trading.
Regulatory Compliance

Q14. KYC (Know Your Customer) requirements for broking clients are mandated by:

  1. A. BSE only
  2. B. SEBI — brokers must verify identity, address, and financial details of all clients before allowing trading
  3. C. RBI for all financial transactions
  4. D. Ministry of Finance directly
Show correct answer & explanation

Correct answer: B. SEBI — brokers must verify identity, address, and financial details of all clients before allowing trading

SEBI mandates KYC compliance for all broking clients. Brokers must verify identity (PAN), address, financial details, and trading experience before activating a trading account. KYC is maintained and updated as required by regulations.
Risk Management

Q15. Exposure limits set by a broker for a client are based on:

  1. A. Client's age only
  2. B. Client's financial details, margin available, and broker's risk policy — prevent over-leveraging
  3. C. Number of years the client has been trading
  4. D. Client's educational qualification
Show correct answer & explanation

Correct answer: B. Client's financial details, margin available, and broker's risk policy — prevent over-leveraging

Exposure limits determine how much a client can trade relative to their available margin. Brokers set limits based on client's financial profile, margin deposited, creditworthiness, and the broker's risk management policy.
Clearing and Settlement

Q16. Pay-out in securities settlement refers to:

  1. A. Investors paying brokerage
  2. B. Distribution of securities (to buyers) and funds (to sellers) by the clearing corporation after pay-in is complete
  3. C. Paying STT to the government
  4. D. Refunding IPO application money
Show correct answer & explanation

Correct answer: B. Distribution of securities (to buyers) and funds (to sellers) by the clearing corporation after pay-in is complete

Pay-out is when the clearing corporation distributes securities to buying brokers and funds to selling brokers, after receiving pay-in from both sides. In T+1, pay-out happens the next business day after the trade.
Back Office Operations

Q17. Broker's back office system is responsible for:

  1. A. Executing trades on the exchange
  2. B. Post-trade processing including trade confirmation, margin calculation, settlement obligations, fund accounting, and regulatory reporting
  3. C. Setting market prices
  4. D. Approving IPO applications
Show correct answer & explanation

Correct answer: B. Post-trade processing including trade confirmation, margin calculation, settlement obligations, fund accounting, and regulatory reporting

A broker's back office handles all post-trade activities: confirming trades to clients, calculating margins, tracking settlement obligations, maintaining client ledgers, generating contract notes, and preparing regulatory reports for SEBI and exchanges.
Securities Markets

Q18. Circuit breakers in equity markets are triggered when:

  1. A. Trading volume exceeds a limit
  2. B. Index or stock price moves beyond a specified percentage — trading is halted temporarily to prevent panic
  3. C. Market opens with a gap
  4. D. FII selling exceeds a limit
Show correct answer & explanation

Correct answer: B. Index or stock price moves beyond a specified percentage — trading is halted temporarily to prevent panic

Circuit breakers halt trading when prices move beyond specified limits. Index-level circuit breakers (10%, 15%, 20% movement in Sensex/Nifty) halt all market trading. Stock-level circuit breakers (5%, 10%, or 20%) halt individual stock trading.
Risk Management

Q19. Square off (position square-off) by the broker means:

  1. A. A client buying more shares
  2. B. The broker forcibly closing a client's open position if margin falls below minimum required level
  3. C. A trade reversal requested by client
  4. D. Converting intraday position to delivery
Show correct answer & explanation

Correct answer: B. The broker forcibly closing a client's open position if margin falls below minimum required level

Square-off is when the broker closes a client's open position (buys what was sold, or sells what was bought) if the client's margin falls below the minimum required level. It limits further loss and protects the broker from credit risk.
Regulatory Compliance

Q20. Unique Client Code (UCC) in stock broking:

  1. A. The broker's SEBI registration number
  2. B. A unique identifier assigned to each client by the broker — uploaded to the exchange to link all trades to the specific client
  3. C. The client's PAN number used for trading
  4. D. The client's Demat account number
Show correct answer & explanation

Correct answer: B. A unique identifier assigned to each client by the broker — uploaded to the exchange to link all trades to the specific client

UCC is a unique identifier assigned by each broker to their client and uploaded to the exchange/depository. It links all trades to the specific client, enabling trade surveillance and investor protection measures.
Trade Lifecycle

Q21. After-market orders (AMO) are:

  1. A. Orders placed only by institutional investors
  2. B. Orders placed outside regular market hours that are queued and sent to the exchange when markets open
  3. C. Orders for shares traded after-hours in US markets
  4. D. Orders that are valid for 1 month
Show correct answer & explanation

Correct answer: B. Orders placed outside regular market hours that are queued and sent to the exchange when markets open

After-Market Orders (AMO) are orders placed by investors through their broker's platform outside regular market hours. These orders are stored and sent to the exchange when the market opens, subject to market conditions.
Clearing and Settlement

Q22. The Settlement Guarantee Fund (SGF) maintained by clearing corporations is used:

  1. A. To pay bonuses to clearing staff
  2. B. To cover settlement obligations if a clearing member defaults — ensuring buyers always receive their securities/funds
  3. C. To fund new exchange technology
  4. D. To pay SEBI penalties
Show correct answer & explanation

Correct answer: B. To cover settlement obligations if a clearing member defaults — ensuring buyers always receive their securities/funds

The Settlement Guarantee Fund (SGF) is maintained by clearing corporations (like NSE Clearing Ltd.) to guarantee the settlement of trades even if a clearing member defaults. It protects all market participants from counterparty default risk.
Back Office Operations

Q23. Ledger balance in a broker's back office system shows:

  1. A. The client's share portfolio
  2. B. The client's cash/fund position — net of all credits (deposits, sale proceeds) and debits (purchases, charges) in their trading account
  3. C. Only brokerage charged
  4. D. Only dividend received
Show correct answer & explanation

Correct answer: B. The client's cash/fund position — net of all credits (deposits, sale proceeds) and debits (purchases, charges) in their trading account

The ledger (fund) balance shows the client's net cash position in the trading account — all credits (funds deposited, sale proceeds, dividends) minus all debits (purchase cost, brokerage, STT, other charges).
Risk Management

Q24. Span Margin for futures and options is calculated by:

  1. A. The broker arbitrarily
  2. B. SEBI's prescribed SPAN (Standard Portfolio Analysis of Risk) methodology — considering all positions in F&O holistically
  3. C. Simply adding up all margins separately
  4. D. Using face value of contracts only
Show correct answer & explanation

Correct answer: B. SEBI's prescribed SPAN (Standard Portfolio Analysis of Risk) methodology — considering all positions in F&O holistically

SPAN (Standard Portfolio Analysis of Risk) is the industry-standard margin calculation methodology used by clearing corporations. It calculates margins by considering the entire F&O portfolio's risk holistically, giving netting benefit for offsetting positions.
Regulatory Compliance

Q25. Running account settlement for clients means:

  1. A. Daily payment to all clients
  2. B. Periodic (monthly or quarterly) settlement of client ledger balances — returning surplus funds to clients while retaining required margin
  3. C. Annual payment to clients
  4. D. Settlement only when clients request
Show correct answer & explanation

Correct answer: B. Periodic (monthly or quarterly) settlement of client ledger balances — returning surplus funds to clients while retaining required margin

SEBI requires brokers to periodically (at least monthly for active clients, quarterly for inactive) settle client account balances — transferring surplus funds back to clients' bank accounts and returning excess securities, except required margin.
Securities Markets

Q26. Insider trading refers to:

  1. A. Trading by internal employees only
  2. B. Trading in securities based on material non-public information (MNPI) — illegal under SEBI regulations
  3. C. Intraday trading by retail investors
  4. D. Trading in the IPO primary market
Show correct answer & explanation

Correct answer: B. Trading in securities based on material non-public information (MNPI) — illegal under SEBI regulations

Insider trading is the illegal practice of buying or selling securities based on material, non-public information (price-sensitive information not yet disclosed to the public). SEBI (Prohibition of Insider Trading) Regulations, 2015 govern this.
Back Office Operations

Q27. Straight Through Processing (STP) in securities operations means:

  1. A. Processing trades manually to ensure accuracy
  2. B. Automated end-to-end electronic processing of trade data from order to settlement without manual intervention
  3. C. Processing only STP mutual fund transactions
  4. D. A separate trading platform
Show correct answer & explanation

Correct answer: B. Automated end-to-end electronic processing of trade data from order to settlement without manual intervention

STP means trade data flows automatically and electronically from order placement through execution, clearing, and settlement without manual intervention. It reduces errors, operational risk, and processing time — enabling faster settlement cycles.
Risk Management

Q28. Concentration risk in a securities portfolio occurs when:

  1. A. The portfolio is well-diversified
  2. B. A large portion of the portfolio is in a single security, sector, or asset class — making it vulnerable to that specific risk
  3. C. The portfolio has too many small positions
  4. D. The portfolio holds only large-cap stocks
Show correct answer & explanation

Correct answer: B. A large portion of the portfolio is in a single security, sector, or asset class — making it vulnerable to that specific risk

Concentration risk arises when a portfolio is heavily weighted in a single security, sector, or asset class. Adverse movement in that concentrated holding can cause disproportionate portfolio damage.
Regulatory Compliance

Q29. SEBI requires stock brokers to maintain client funds:

  1. A. Commingled with broker's own funds for ease
  2. B. In separate bank accounts, completely segregated from the broker's own funds
  3. C. In foreign currency accounts
  4. D. In government bonds only
Show correct answer & explanation

Correct answer: B. In separate bank accounts, completely segregated from the broker's own funds

SEBI mandates that client funds must be kept in separate bank accounts, segregated from the broker's own funds. This protects client money from being used for the broker's own purposes or from being at risk if the broker defaults.
Trade Lifecycle

Q30. A Stop Loss Order is:

  1. A. An order to buy at current market price
  2. B. An order that automatically sells (or buys) a security when it reaches a specified trigger price — limiting loss on a position
  3. C. An order to stop all trading activity
  4. D. An order valid only in bear markets
Show correct answer & explanation

Correct answer: B. An order that automatically sells (or buys) a security when it reaches a specified trigger price — limiting loss on a position

A Stop Loss order triggers a sell order (to limit loss on a long position) or buy order (to limit loss on a short position) when the security's price reaches a pre-specified trigger price. It automates loss-limitation.
Back Office Operations

Q31. Tax Deducted at Source (TDS) on securities transactions is deducted by brokers on:

  1. A. All brokerage commissions
  2. B. Dividends paid above threshold and certain other securities income as per Income Tax Act provisions
  3. C. All capital gains automatically
  4. D. Monthly income from trading
Show correct answer & explanation

Correct answer: B. Dividends paid above threshold and certain other securities income as per Income Tax Act provisions

Brokers are required to deduct TDS on certain securities income — such as dividends above Rs. 5,000 per year and interest on bonds. Capital gains are generally self-assessed by investors when filing income tax returns.
Securities Markets

Q32. FPO (Follow-on Public Offer) is:

  1. A. Same as IPO
  2. B. A public offer of new shares by a company that is already listed on a stock exchange — to raise additional capital
  3. C. An offer only to existing shareholders
  4. D. A secondary market transaction
Show correct answer & explanation

Correct answer: B. A public offer of new shares by a company that is already listed on a stock exchange — to raise additional capital

An FPO (Follow-on Public Offer) is when an already-listed company issues new shares to the public to raise additional capital. Unlike an IPO, the company is already listed. Proceeds go to the company (fresh issue) or existing shareholders (offer for sale).
Risk Management

Q33. Counterparty risk in securities trading is the risk that:

  1. A. The exchange closes down
  2. B. The other party to a trade fails to fulfill their settlement obligation (deliver securities or pay funds)
  3. C. Market prices move adversely
  4. D. The broker increases brokerage
Show correct answer & explanation

Correct answer: B. The other party to a trade fails to fulfill their settlement obligation (deliver securities or pay funds)

Counterparty risk is the risk that the buyer or seller in a trade fails to meet their settlement obligation. Clearing corporations largely eliminate this risk by acting as central counterparty and guaranteeing settlement to both sides.
Regulatory Compliance

Q34. The Investor Protection Fund (IPF) at stock exchanges is used to:

  1. A. Fund new listings
  2. B. Compensate investors for losses arising from broker defaults — up to specified limits
  3. C. Pay SEBI fines
  4. D. Finance exchange infrastructure
Show correct answer & explanation

Correct answer: B. Compensate investors for losses arising from broker defaults — up to specified limits

The Investor Protection Fund (IPF) maintained by stock exchanges compensates investors when their broker defaults and is unable to meet their obligations. Compensation is subject to per-claim limits set by the exchange and SEBI.
Clearing and Settlement

Q35. T+1 settlement cycle in India means:

  1. A. Trade and settlement happen simultaneously
  2. B. Trade executed on Monday is settled on Tuesday — securities and funds exchanged within 1 business day
  3. C. Settlement in 1 week
  4. D. Settlement in 2 days like international markets
Show correct answer & explanation

Correct answer: B. Trade executed on Monday is settled on Tuesday — securities and funds exchanged within 1 business day

T+1 settlement means trades are settled within 1 business day. A trade executed on Monday has securities credited to the buyer's Demat account and funds credited to the seller's bank account by Tuesday. India was among the first major markets globally to implement T+1.

How to use this set

Work through the questions in order without expanding the answers first, exactly as you would in the real Series VII exam. Once you have picked an option, expand the answer to confirm whether you were right and read the explanation, even for questions you answered correctly, since the reasoning behind each option is where most of the learning happens.

If you get a question wrong, note the topic tag above the question and revisit that topic in the Series VII exam page before your next attempt. When you are ready for exam-condition practice, use the timed mock test above; it shuffles these questions, applies the negative marking rule, and gives you a scored review at the end.