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Series XII · Practice Set 1

NISM Series XII: Securities Markets Foundation Certification — Practice Set 1 Practice Questions

Original practice set for NISM Series XII: Securities Markets Foundation 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.

Introduction to Securities Markets

Q1. Securities markets are broadly classified into:

  1. A. Commodity market and forex market
  2. B. Primary market (new issues) and secondary market (trading of existing securities)
  3. C. Equity market and bond market only
  4. D. Domestic and international markets only
Show correct answer & explanation

Correct answer: B. Primary market (new issues) and secondary market (trading of existing securities)

Securities markets are classified into primary markets (where new securities are issued to raise capital from investors) and secondary markets (where already-issued securities are traded among investors through stock exchanges).
Financial Instruments

Q2. Equity shares represent:

  1. A. A loan given to the company
  2. B. Ownership stake in the company — shareholders are part-owners and share in profits through dividends and capital appreciation
  3. C. A fixed return instrument
  4. D. A government-backed investment
Show correct answer & explanation

Correct answer: B. Ownership stake in the company — shareholders are part-owners and share in profits through dividends and capital appreciation

Equity shares represent proportional ownership in a company. Shareholders are part-owners who share in profits (dividends) and capital gains. They have voting rights and bear the residual risk after debt holders are paid.
Financial Instruments

Q3. A bond is different from a share because:

  1. A. Bond holders own the company; shareholders don't
  2. B. Bond holders are creditors (lenders) receiving fixed interest; shareholders are owners bearing residual risk
  3. C. Bonds give higher returns always
  4. D. Bonds cannot be traded on exchanges
Show correct answer & explanation

Correct answer: B. Bond holders are creditors (lenders) receiving fixed interest; shareholders are owners bearing residual risk

Bond holders are creditors — they lend money to the company and receive fixed interest (coupon) and principal repayment. Shareholders are owners bearing residual risk. Bond holders have priority over shareholders in case of liquidation.
Market Participants

Q4. A stockbroker's primary role is to:

  1. A. Manage mutual funds
  2. B. Act as intermediary between investors and the stock exchange — executing buy and sell orders on behalf of clients
  3. C. Regulate the market
  4. D. Issue new shares to the public
Show correct answer & explanation

Correct answer: B. Act as intermediary between investors and the stock exchange — executing buy and sell orders on behalf of clients

A stockbroker is a SEBI-registered intermediary who acts as an agent between investors and stock exchanges, executing buy and sell orders on behalf of clients. They charge brokerage for this service.
Stock Exchanges

Q5. NSE and BSE are:

  1. A. Banks regulated by RBI
  2. B. SEBI-regulated stock exchanges where securities are listed and traded
  3. C. Government departments
  4. D. Rating agencies
Show correct answer & explanation

Correct answer: B. SEBI-regulated stock exchanges where securities are listed and traded

NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) are the two major stock exchanges in India, regulated by SEBI. They provide a platform for buying and selling listed securities and for price discovery.
Stock Exchanges

Q6. The Sensex is:

  1. A. A mutual fund index
  2. B. The benchmark stock market index of BSE comprising 30 large, well-established companies
  3. C. An index of all listed companies
  4. D. The government bond yield index
Show correct answer & explanation

Correct answer: B. The benchmark stock market index of BSE comprising 30 large, well-established companies

The BSE Sensex (Sensitive Index) is BSE's benchmark index comprising 30 large, well-established, and financially sound companies representing key sectors of the Indian economy. It is one of India's most tracked market indicators.
Stock Exchanges

Q7. Nifty 50 is:

  1. A. A commodity index
  2. B. NSE's benchmark index comprising 50 large-cap companies across key economic sectors
  3. C. An index of 50 small-cap companies
  4. D. A government securities index
Show correct answer & explanation

Correct answer: B. NSE's benchmark index comprising 50 large-cap companies across key economic sectors

Nifty 50 is NSE's flagship benchmark index comprising 50 well-diversified, large-cap companies across key sectors of the Indian economy. It represents about 65% of the total market capitalisation of NSE-listed companies.
Regulatory Framework

Q8. SEBI (Securities and Exchange Board of India) was established in:

  1. A. 1980
  2. B. 1988 (statutory powers in 1992)
  3. C. 2000
  4. D. 1996
Show correct answer & explanation

Correct answer: B. 1988 (statutory powers in 1992)

SEBI was established in 1988 as a non-statutory body and given statutory powers through the SEBI Act, 1992. It is the primary regulator of the securities markets in India, protecting investor interests and developing the market.
Regulatory Framework

Q9. RBI regulates which of the following in the financial sector?

  1. A. Stock exchanges and mutual funds
  2. B. Banks, banking operations, monetary policy, currency, and government securities market
  3. C. Insurance companies
  4. D. Commodities exchanges
Show correct answer & explanation

Correct answer: B. Banks, banking operations, monetary policy, currency, and government securities market

RBI (Reserve Bank of India) regulates banks, controls monetary policy (repo rate, CRR, SLR), manages foreign exchange, oversees government securities market, and regulates payment systems. SEBI regulates capital markets.
Financial Instruments

Q10. Government Securities (G-Secs) are:

  1. A. Equity shares of government companies
  2. B. Debt instruments issued by the central or state government to borrow money from the market
  3. C. Bonds issued by private companies only
  4. D. Mutual fund units backed by government
Show correct answer & explanation

Correct answer: B. Debt instruments issued by the central or state government to borrow money from the market

Government Securities (G-Secs) are debt instruments issued by the central government (through RBI) or state governments to fund their borrowing requirements. They carry zero credit risk as they are backed by the sovereign.
Investing Basics

Q11. Market capitalisation of a company is:

  1. A. The company's total profit
  2. B. Current market price per share × Total number of outstanding shares
  3. C. The company's total assets
  4. D. The face value of all shares
Show correct answer & explanation

Correct answer: B. Current market price per share × Total number of outstanding shares

Market Capitalisation = Current Market Price × Total Outstanding Shares. It represents the total market value of a company's equity. Companies are classified as large-cap (top 100), mid-cap (101-250), and small-cap (251 onwards) by market cap.
Financial Instruments

Q12. Debentures are:

  1. A. Equity instruments giving ownership rights
  2. B. Fixed income debt instruments issued by companies, backed by a charge on company assets
  3. C. Government-guaranteed instruments
  4. D. Currency derivatives
Show correct answer & explanation

Correct answer: B. Fixed income debt instruments issued by companies, backed by a charge on company assets

Debentures are fixed income debt instruments issued by companies to raise long-term capital. They carry fixed interest (coupon) and repay principal at maturity. They may be secured (backed by company assets) or unsecured.
Market Participants

Q13. FPIs (Foreign Portfolio Investors) in Indian markets are:

  1. A. Indian investors investing abroad
  2. B. Foreign investors who invest in Indian listed securities (equity, bonds) through a registered route — regulated by SEBI
  3. C. NRIs investing in real estate
  4. D. Foreign companies setting up factories in India
Show correct answer & explanation

Correct answer: B. Foreign investors who invest in Indian listed securities (equity, bonds) through a registered route — regulated by SEBI

FPIs are foreign institutional and individual investors who invest in Indian listed securities (equity shares, bonds, derivatives) through the SEBI-regulated FPI route. They are a significant source of foreign capital in Indian markets.
Investing Basics

Q14. Dividend from a stock is:

  1. A. Guaranteed fixed payment
  2. B. A share of the company's profits distributed to shareholders — declared by the board of directors, not guaranteed
  3. C. Interest payment on shares
  4. D. Return of the original investment
Show correct answer & explanation

Correct answer: B. A share of the company's profits distributed to shareholders — declared by the board of directors, not guaranteed

Dividend is a portion of a company's profits distributed to shareholders, declared at the discretion of the board of directors. It is not guaranteed and depends on the company's profitability and dividend policy.
Financial Instruments

Q15. Commercial Paper (CP) is:

  1. A. Physical currency notes
  2. B. A short-term unsecured debt instrument issued by creditworthy companies to raise working capital — maturity of 7 days to 1 year
  3. C. A long-term bond
  4. D. A commodity derivative
Show correct answer & explanation

Correct answer: B. A short-term unsecured debt instrument issued by creditworthy companies to raise working capital — maturity of 7 days to 1 year

Commercial Paper is a short-term, unsecured money market instrument issued by highly rated companies to meet short-term working capital needs. Maturities range from 7 days to 1 year. It is issued at a discount and redeemed at face value.
Stock Exchanges

Q16. Circuit filters (price bands) on stocks are:

  1. A. Physical barriers in trading floors
  2. B. Daily price movement limits (e.g., +/- 5%, 10%, 20%) beyond which trading is halted to prevent extreme volatility
  3. C. Limits on the number of shares that can be traded
  4. D. Filters to prevent overseas investors from trading
Show correct answer & explanation

Correct answer: B. Daily price movement limits (e.g., +/- 5%, 10%, 20%) beyond which trading is halted to prevent extreme volatility

Price bands (circuit filters) are SEBI-mandated daily price movement limits for individual stocks. Most stocks have +/- 10% or 20% daily limit. If a stock hits the limit (circuit breaker), trading is paused temporarily to prevent panic or manipulation.
Regulatory Framework

Q17. IRDAI (Insurance Regulatory and Development Authority of India) regulates:

  1. A. Stock markets
  2. B. Life and non-life insurance companies in India
  3. C. Mutual funds
  4. D. Banking sector
Show correct answer & explanation

Correct answer: B. Life and non-life insurance companies in India

IRDAI is the regulatory body for the insurance sector in India — overseeing life insurance, general (non-life) insurance, and health insurance companies. It protects policyholder interests and develops the insurance market.
Market Participants

Q18. A Market Maker in securities markets is an entity that:

  1. A. Manipulates prices
  2. B. Continuously quotes buy and sell prices for a security, providing liquidity by being ready to trade at publicly quoted prices
  3. C. Issues new securities
  4. D. Regulates trading activities
Show correct answer & explanation

Correct answer: B. Continuously quotes buy and sell prices for a security, providing liquidity by being ready to trade at publicly quoted prices

A Market Maker continuously provides two-way quotes (bid and ask prices) for a security, ensuring investors can always buy or sell. They earn the bid-ask spread and provide liquidity especially for less-frequently traded securities.
Investing Basics

Q19. Price-to-Earnings (P/E) ratio helps investors:

  1. A. Calculate total dividends received
  2. B. Compare the market price of a stock to its earnings — a stock with P/E of 20 means investors pay Rs. 20 for every Rs. 1 of annual earnings
  3. C. Calculate the company's total debt
  4. D. Determine the stock's face value
Show correct answer & explanation

Correct answer: B. Compare the market price of a stock to its earnings — a stock with P/E of 20 means investors pay Rs. 20 for every Rs. 1 of annual earnings

P/E Ratio = Market Price / EPS. It shows how much investors are paying for each rupee of earnings. A high P/E may indicate growth expectations or overvaluation; low P/E may indicate value opportunity or poor fundamentals.
Financial Instruments

Q20. ETFs (Exchange Traded Funds) are:

  1. A. Active mutual funds traded only at NAV at end of day
  2. B. Passive funds that track an index (e.g., Nifty 50 ETF) and are traded on stock exchanges throughout the day like shares
  3. C. Government bonds listed on exchange
  4. D. Derivatives of mutual funds
Show correct answer & explanation

Correct answer: B. Passive funds that track an index (e.g., Nifty 50 ETF) and are traded on stock exchanges throughout the day like shares

ETFs are investment funds that typically track an index and are listed on stock exchanges. They trade throughout the day at market prices (unlike mutual fund NAV at end of day). They combine diversification of a fund with trading flexibility of a share.
Regulatory Framework

Q21. PFRDA (Pension Fund Regulatory and Development Authority) regulates:

  1. A. All retirement savings including PPF
  2. B. National Pension System (NPS) and pension funds
  3. C. Mutual funds with retirement focus
  4. D. EPFO (Employee Provident Fund Organisation)
Show correct answer & explanation

Correct answer: B. National Pension System (NPS) and pension funds

PFRDA regulates the National Pension System (NPS) and pension funds in India. It oversees the registration of pension fund managers, point of presence (PoP) entities, and central recordkeeping agencies under NPS.
Investing Basics

Q22. Compound interest differs from simple interest in that:

  1. A. Simple interest gives higher returns always
  2. B. Compound interest calculates interest on both principal and accumulated interest — returns grow exponentially over time
  3. C. They are mathematically identical
  4. D. Compound interest only applies to mutual funds
Show correct answer & explanation

Correct answer: B. Compound interest calculates interest on both principal and accumulated interest — returns grow exponentially over time

Simple interest calculates interest only on the principal. Compound interest calculates interest on principal PLUS previously earned interest — the 'interest on interest' effect creates exponential growth over time, especially over long periods.
Market Participants

Q23. A Depository (NSDL/CDSL) in Indian securities markets:

  1. A. Issues new shares to companies
  2. B. Holds securities in electronic (dematerialised) form and facilitates electronic transfer and settlement
  3. C. Regulates stock exchanges
  4. D. Acts as a clearing corporation
Show correct answer & explanation

Correct answer: B. Holds securities in electronic (dematerialised) form and facilitates electronic transfer and settlement

Depositories (NSDL and CDSL) hold all listed securities in electronic form in investors' Demat accounts and facilitate electronic transfer of securities during settlement. They eliminate physical share certificates.
Financial Instruments

Q24. Treasury Bills (T-Bills) issued by the Government of India have maturities of:

  1. A. 1 year, 2 years, and 5 years
  2. B. 91 days, 182 days, and 364 days
  3. C. 3 months, 6 months, and 1 year
  4. D. 1 month, 3 months, and 6 months
Show correct answer & explanation

Correct answer: B. 91 days, 182 days, and 364 days

Treasury Bills in India are issued with standard maturities of 91 days, 182 days, and 364 days. They are zero-coupon instruments issued at a discount to face value and redeemed at face value at maturity.
Stock Exchanges

Q25. Upper and lower price limits (circuit limits) in Indian equity markets are set by:

  1. A. Company management
  2. B. Stock exchanges with SEBI approval — based on stock volatility, liquidity, and market cap
  3. C. Individual investors
  4. D. FPIs collectively
Show correct answer & explanation

Correct answer: B. Stock exchanges with SEBI approval — based on stock volatility, liquidity, and market cap

Stock exchanges (NSE/BSE) set price bands (circuit limits) for individual securities with SEBI's approval. Bands vary: 2%, 5%, 10%, or 20% depending on the stock's liquidity, volatility history, and market capitalisation.
Investing Basics

Q26. Book value per share of a company is:

  1. A. The market price of the share
  2. B. Shareholders' equity (total assets minus total liabilities) divided by total shares outstanding
  3. C. The face value of the share
  4. D. The dividend paid per share
Show correct answer & explanation

Correct answer: B. Shareholders' equity (total assets minus total liabilities) divided by total shares outstanding

Book Value Per Share = Shareholders' Equity / Total Shares Outstanding. It represents the net asset value per share if the company were to be liquidated at accounting values. Comparing market price to book value (P/B ratio) helps assess valuation.
Regulatory Framework

Q27. The Prevention of Money Laundering Act (PMLA) requires financial intermediaries to:

  1. A. Report all transactions to SEBI
  2. B. Conduct due diligence on clients, maintain records, and report suspicious transactions to FIU-IND
  3. C. Reject all cash transactions
  4. D. Pay anti-money laundering fees to government
Show correct answer & explanation

Correct answer: B. Conduct due diligence on clients, maintain records, and report suspicious transactions to FIU-IND

PMLA requires financial intermediaries (brokers, AMCs, banks) to: conduct KYC/CDD on all clients, maintain transaction records for 5 years, and report cash transactions above Rs. 10 lakh and suspicious transactions to FIU-IND (Financial Intelligence Unit India).
Market Participants

Q28. Credit Rating Agencies in India (like CRISIL, ICRA, CARE) provide:

  1. A. Stock price predictions
  2. B. Independent assessment of credit risk (probability of default) for debt instruments and issuers
  3. C. Stock buy/sell recommendations
  4. D. Audit services for companies
Show correct answer & explanation

Correct answer: B. Independent assessment of credit risk (probability of default) for debt instruments and issuers

Credit rating agencies (CRAs) provide independent credit ratings for debt instruments (bonds, debentures, CPs) and issuers, indicating the probability of default. Ratings range from AAA (highest safety) to D (default). SEBI regulates CRAs in India.
Financial Instruments

Q29. ADR (American Depository Receipt) allows:

  1. A. US investors to buy US shares
  2. B. Indian companies to raise capital from US investors and list on US stock exchanges without directly listing Indian shares
  3. C. Indian investors to buy US shares
  4. D. Only FPIs to invest in Indian companies
Show correct answer & explanation

Correct answer: B. Indian companies to raise capital from US investors and list on US stock exchanges without directly listing Indian shares

An ADR is a certificate issued by a US bank representing shares in a non-US company. Indian companies like Infosys, HDFC Bank, and Wipro have ADRs listed on US exchanges (NYSE, NASDAQ), allowing US investors to invest in them without dealing in Indian markets.
Investing Basics

Q30. Rupee Cost Averaging (RCA) benefits investors because:

  1. A. It guarantees profits regardless of markets
  2. B. By investing a fixed amount regularly, more units are bought when prices are low and fewer when prices are high — reducing average cost per unit over time
  3. C. It eliminates all investment risk
  4. D. It provides fixed returns like an FD
Show correct answer & explanation

Correct answer: B. By investing a fixed amount regularly, more units are bought when prices are low and fewer when prices are high — reducing average cost per unit over time

RCA through regular fixed investments (like SIP) automatically buys more units when NAV/prices are low and fewer when high. Over time, this reduces the average cost per unit and removes the need to time the market.
Regulatory Framework

Q31. SEBI's primary objectives are:

  1. A. Only to regulate stock exchanges
  2. B. Protecting investor interests, developing the securities market, and regulating market participants
  3. C. Maximising FPI inflows
  4. D. Setting interest rates for the economy
Show correct answer & explanation

Correct answer: B. Protecting investor interests, developing the securities market, and regulating market participants

SEBI's three-pronged objectives under the SEBI Act, 1992 are: (1) Protection of investor interests, (2) Promotion of development of the securities market, and (3) Regulation of the securities market and market participants.
Market Participants

Q32. Mutual Fund houses (AMCs) collect money from investors and:

  1. A. Lend it to banks
  2. B. Pool it and invest in a diversified portfolio of securities as per the scheme's stated investment mandate — professionally managed
  3. C. Keep it as cash only
  4. D. Invest only in fixed deposits
Show correct answer & explanation

Correct answer: B. Pool it and invest in a diversified portfolio of securities as per the scheme's stated investment mandate — professionally managed

AMCs (Asset Management Companies) pool money from investors and invest it in a diversified portfolio of securities (equity, debt, gold, etc.) according to the scheme's investment mandate. They charge an expense ratio for professional management.
Financial Instruments

Q33. The risk-return trade-off in investing means:

  1. A. Higher risk always means higher actual returns
  2. B. Generally, higher potential return comes with higher risk — investors must accept more risk to earn higher expected returns
  3. C. Government bonds give highest returns with lowest risk
  4. D. Equity is always safer than debt
Show correct answer & explanation

Correct answer: B. Generally, higher potential return comes with higher risk — investors must accept more risk to earn higher expected returns

The risk-return trade-off is fundamental — generally, to earn higher expected returns, investors must accept higher risk (variability of returns). Equity has historically provided higher long-term returns than bonds, but with more short-term volatility.
Investing Basics

Q34. Liquidity of an investment refers to:

  1. A. The total returns it provides
  2. B. How quickly and easily it can be converted to cash without significant loss in value
  3. C. The level of risk it carries
  4. D. The tax implications of the investment
Show correct answer & explanation

Correct answer: B. How quickly and easily it can be converted to cash without significant loss in value

Liquidity is the ease with which an investment can be converted to cash at or near its fair market value. Bank savings accounts are highly liquid; real estate and private equity are illiquid. Mutual fund units (open-ended) are generally liquid.
Regulatory Framework

Q35. Investor grievances in securities markets can be addressed through:

  1. A. Only court proceedings
  2. B. SEBI SCORES portal, stock exchange grievance cells, SEBI's ODR (Online Dispute Resolution) portal, and SEBI Investor Helpline (1800 266 7575)
  3. C. Only by writing to the company
  4. D. Only RBI
Show correct answer & explanation

Correct answer: B. SEBI SCORES portal, stock exchange grievance cells, SEBI's ODR (Online Dispute Resolution) portal, and SEBI Investor Helpline (1800 266 7575)

Investors can seek redressal through multiple channels: SEBI SCORES portal (scores.sebi.gov.in), stock exchange investor service cells, SEBI's ODR (Online Dispute Resolution) platform for arbitration, and SEBI Investor Helpline 1800 266 7575.

How to use this set

Work through the questions in order without expanding the answers first, exactly as you would in the real Series XII 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 XII 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.