Assam University: Silchar
Fundamentals of Investment
Solved Paper Question Paper 2021
COMMERCE (6th Semester)
Course No. COMDSE-601T/602T
(Fundamentals of Investment)
Full Marks: 70
Pass Marks: 28
Time: 3 hours
The figures in the margin indicate full marks for the questions
SECTION-A
Answer Any Ten of the following questions: 2x10=20
1. What is the expected return to an investor?
Answer: The expected return to an investor refers to the anticipated gain or loss on an investment over a specified period. It is the average return an investor can expect based on the probabilities of different outcomes and their associated returns.
2. What is called systematic risk?
Answer: Systematic risk, also known as market risk or non-diversifiable risk, is the risk that is inherent in the overall market or an entire market segment. It cannot be eliminated through diversification because it affects the entire market. Examples of systematic risk factors include economic recessions, political instability, interest rate changes, and natural disasters.
3. Who are the participants in securities market?
Answer: The participants in the securities market include investors, issuers, intermediaries, and regulators. Investors are individuals or institutions who buy and sell securities. Issuers are entities such as corporations or governments that issue securities to raise capital. Intermediaries, such as brokers and investment banks, facilitate the buying and selling of securities. Regulators, such as securities exchanges and regulatory bodies like the Securities and Exchange Commission (SEC), oversee and regulate the securities market.
4. What is risk-return tradeoff?
Answer: Risk-return tradeoff is the principle that higher potential returns are generally associated with higher levels of risk. It implies that investors must be willing to accept greater risks if they seek higher returns. This tradeoff suggests that investments with higher potential returns, such as stocks or venture capital, also carry a higher risk of loss compared to safer investments like bonds or savings accounts.
5. What is interest rate risk?
Answer: Interest rate risk refers to the potential for changes in interest rates to affect the value of an investment. It primarily affects fixed-income investments, such as bonds, where changes in interest rates can lead to changes in bond prices. When interest rates rise, bond prices generally fall, and vice versa. Therefore, investors holding fixed-income securities face the risk that their investments may decrease in value due to interest rate fluctuations.
6. What is called coupon rate?
Answer: The coupon rate is the fixed annual interest rate paid by a bond issuer to the bondholder. It is expressed as a percentage of the bond's face value and determines the periodic interest payments the bondholder will receive. For example, a bond with a face value of $1,000 and a coupon rate of 5% will pay $50 in annual interest to the bondholder.
7. What is yield to maturity?
Answer: Yield to maturity (YTM) is the total return anticipated on a bond if held until its maturity date. It takes into account the bond's current market price, its face value, the coupon rate, and the time remaining until maturity. YTM represents the annualized rate of return an investor can expect from a bond, assuming all coupon payments are reinvested at the same rate.
8. What is default risk in a bond?
Answer: Default risk, also known as credit risk, is the risk that a bond issuer may not be able to make timely payments of principal and interest to bondholders. If an issuer defaults, bondholders may not receive the full amount of their investment or may experience delays in receiving payments. The level of default risk varies among different issuers and is influenced by their creditworthiness and financial stability.
9. What is industry analysis in the context of investment management?
Answer: Industry analysis, in the context of investment management, involves evaluating the performance, trends, and competitive dynamics of specific industries or sectors. It aims to assess the attractiveness and potential risks associated with investing in particular industries. Industry analysis considers factors such as market size, growth prospects, competition, regulatory environment, technological advancements, and other industry-specific variables to make informed Apologies for the interruption. Here are the answers to the remaining questions:
10. What is called the intrinsic value of a share?
Answer: The intrinsic value of a share refers to the perceived or calculated underlying value of a stock. It is based on fundamental analysis and takes into account factors such as the company's financial performance, earnings, growth prospects, assets, and other relevant metrics. The intrinsic value is used by investors to determine whether a stock is undervalued or overvalued in relation to its market price.
11. Define price-earnings ratio.
Answer: The price-earnings ratio (P/E ratio) is a financial metric used to assess the valuation of a company's stock. It is calculated by dividing the market price per share by the earnings per share (EPS). The P/E ratio indicates how much investors are willing to pay for each dollar of earnings generated by the company. It is commonly used as a tool to compare the relative value of stocks within an industry or the overall market.
12. What is called the weak form of efficiency in relation to the efficient market hypothesis?
Answer: The weak form of efficiency, as per the efficient market hypothesis (EMH), states that all past publicly available information about a security is reflected in its current market price. In other words, the weak form suggests that it is not possible to consistently achieve above-average returns by analyzing historical price data or using technical analysis techniques. If the weak form of efficiency holds, it implies that stock prices follow a random walk and that it is difficult to gain an advantage based on historical information alone.
13. What is portfolio analysis in relation to investment management?
Answer: Portfolio analysis involves the evaluation and management of an investment portfolio. It includes assessing the risk and return characteristics of different investments, analyzing the correlation between portfolio assets, and making strategic decisions to optimize the portfolio's performance. Portfolio analysis takes into account factors such as asset allocation, diversification, risk tolerance, investment goals, and time horizon to create a well-balanced and tailored investment portfolio.
14. What is a futures contract?
Answer: A futures contract is a standardized agreement to buy or sell a specific asset, such as commodities, currencies, or financial instruments, at a predetermined price and date in the future. Futures contracts are traded on regulated exchanges, and they serve as a mechanism for hedging against price volatility or speculating on future price movements. Unlike options contracts, futures contracts oblige both parties to fulfill the terms of the agreement at the specified future date.
15. What is an open-ended mutual fund scheme?l
Answer: An open-ended mutual fund scheme is a type of investment fund where investors can buy or sell units of the fund at any time directly from the fund house. The number of units in the fund can fluctuate based on investor demand. Open-ended funds do not have a fixed maturity date and continuously offer liquidity to investors. The fund's net asset value (NAV) is calculated daily based on the value of the underlying securities in the fund's portfolio.
16. What is a forward contract?
Answer: A forward contract is a private agreement between two parties to buy or sell an asset at a predetermined price on a future date. Unlike futures contracts, forward contracts are not traded on exchanges and are customized to the specific needs of the parties involved. They are commonly used for hedging or speculation purposes. The terms of the forward contract, including the price, quantity, and delivery date, are negotiated between the buyer and the seller.
17. What are the objectives of SEBI?
Answer: The Securities and Exchange Board of India (SEBI) is the regulatory authority for the securities market in India.
Its primary objectives include:
Protecting the interests of investors in securities and promoting their development.
Regulating and overseeing the functioning of securities markets to ensure fairness, transparency, and efficiency
Preventing fraudulent and unfair trade practices in the securities market.
18. Name the agencies for redressal of investors' grievances.
Answer: In India, the primary agency for redressal of investors' grievances is the Securities and Exchange Board of India (SEBI). SEBI has established an Investor Grievance Redressal Mechanism to address complaints and grievances related to securities market activities. Additionally, stock exchanges and depositories also have grievance redressal mechanisms in place to handle investor complaints.
19. What is insider trading?l
Answer: Insider trading refers to the buying or selling of securities by individuals who have access to non-public, material information about the company. Insider trading is generally illegal as it gives the insiders an unfair advantage over other market participants. It undermines the integrity and fairness of the securities market. Laws and regulations are in place in most jurisdictions to prevent and punish insider trading activities.
20. What is investors' activism?
Answer: Investors' activism refers to the active involvement and engagement of shareholders in a company's affairs to influence corporate decision-making and improve corporate governance practices. Activist investors often acquire a significant stake in a company and use their ownership rights to advocate for changes they believe will enhance shareholder value. This can include actions such as proxy voting, shareholder proposals, board representation, and public advocacy for specific corporate actions or reforms.
SECTION-B
Answer any five of the following questions: 10x5=50
21. What are the basic information required to take an investment decision? Briefly discuss the different sources of financial information. 4+6=10
Answer:- When making an investment decision, it is important to gather and analyze various types of information to assess the potential risks and returns. Here are some basic information required to make an investment decision:
1. Investment Objective: Determine your investment goals, such as capital appreciation, income generation, or wealth preservation.
2. Risk Tolerance: Assess your willingness and ability to tolerate investment risks. Consider factors like age, financial situation, and investment experience.
3. Time Horizon: Determine the length of time you plan to hold the investment. It can range from short-term (less than a year) to long-term (several years or more).
4. Asset Allocation: Decide on the proportion of your investment portfolio to allocate across different asset classes, such as stocks, bonds, real estate, or commodities.
5. Fundamental Analysis: Evaluate the financial health, performance, and future prospects of the investment. This involves analyzing financial statements, market trends, industry dynamics, and competitive landscape.
6. Technical Analysis: Study price patterns, trading volumes, and other market indicators to identify trends and make predictions about future price movements.
7. Economic and Market Analysis: Stay informed about macroeconomic factors like interest rates, inflation, GDP growth, and geopolitical events that can impact the investment markets.
8. Company-specific Information: If investing in individual stocks, gather information about the company's management team, business model, competitive advantages, and potential risks.
9. Regulatory Environment: Understand the legal and regulatory framework governing the investment, including tax implications, compliance requirements, and any restrictions or limitations.
10. Diversification: Spread your investments across different assets, sectors, or geographical regions to reduce risk and enhance potential returns.
Regarding the sources of financial information, here are some common ones:
1. Company Reports: Annual reports, quarterly earnings statements, and other disclosures provided by companies to shareholders.
2. Financial News Networks: Television channels, online platforms, and news agencies that provide real-time financial news, analysis, and expert opinions.
3. Financial Websites and Portals: Websites dedicated to finance and investment that offer a wide range of financial information, market data, research reports, and investment tools.
4. Regulatory Filings: Publicly traded companies are required to file reports with regulatory bodies such as the Securities and Exchange Commission (SEC) in the United States. These filings include information about the company's financials, operations, and key events.
5. Brokerage Platforms: Online brokerage firms provide access to research reports, analyst recommendations, financial data, and other investment-related information.
6. Industry Associations: Trade associations and professional organizations often publish industry-specific reports, statistics, and market research.
7. Social Media and Online Forums: Platforms like Twitter, Reddit, and specialized investment forums can provide insights, discussions, and opinions on various investments.
8. Government Agencies: Economic data, reports, and publications released by government entities such as central banks, statistical offices, and financial regulators.
It's important to verify the credibility and reliability of the sources and cross-reference information from multiple sources to ensure accuracy and reduce the risk of bias.
22. What is the real return on investment? Do you think that taxes and inflation have an impact on return from investment? Justify your answer. 3+7=10
Answer:- The real return on investment refers to the actual purchasing power gained or lost from an investment after accounting for the impact of inflation. It represents the return adjusted for inflation, reflecting the investment's ability to generate growth above and beyond the rate of inflation.
Taxes and inflation indeed have a significant impact on the return from an investment:
1. Taxes: When earning income from investments, taxes can reduce the overall return. Governments often impose taxes on investment gains, such as capital gains taxes, dividend taxes, or interest income taxes. The tax rate and applicable rules vary depending on the jurisdiction and the type of investment. Therefore, it's important to consider the tax implications while evaluating the potential return on investment.
2. Inflation: Inflation erodes the purchasing power of money over time. As prices for goods and services rise, the value of each unit of currency decreases. If the return on investment does not outpace the inflation rate, the investor may experience a decrease in real wealth. For example, if the investment return is 5% and the inflation rate is 3%, the real return would be only 2%. Thus, it is crucial to consider the inflation rate and aim for investment returns that exceed it to maintain or grow purchasing power.
Considering taxes and inflation is essential for a realistic assessment of investment returns. Ignoring these factors can lead to a misjudgment of the true profitability of an investment. Investors should account for taxes in their calculations and strive to achieve returns that surpass the inflation rate to ensure that their investments are generating positive real returns and preserving their purchasing power over time.
23. What is a bond? Discuss different types of bond and their features. 4+6=10
Answer:- A bond is a fixed-income investment where an investor lends money to an issuer, typically a government entity or a corporation, for a fixed period of time at a predetermined interest rate. Bonds are debt instruments through which the issuer borrows funds and promises to repay the principal amount, known as the face value or par value, at the maturity date. In the meantime, periodic interest payments, known as coupon payments, are made to the bondholder.
Here are different types of bonds and their features:
1. Government Bonds: These bonds are issued by governments to finance their operations or specific projects. They are considered low-risk investments as governments are typically reliable borrowers. Government bonds can be further classified into:
a. Treasury Bonds: Issued by the government, typically with longer maturities (10 years or more). They are considered safe investments.
b. Treasury Notes: Similar to treasury bonds but with shorter maturities, usually between 2 and 10 years.
c. Treasury Bills: Short-term government bonds with maturities of one year or less. They are sold at a discount and do not pay periodic interest.
2. Corporate Bonds: Issued by corporations to raise capital for various purposes, such as expansion, acquisitions, or debt refinancing. Corporate bonds offer higher yields compared to government bonds but also carry higher risk. Features of corporate bonds can vary, including different interest payment frequencies and varying maturities.
3. Municipal Bonds: Issued by state and local governments to fund public projects, such as schools, highways, or utilities. Municipal bonds can be either taxable or tax-exempt, depending on the issuer and the purpose of the bond. The interest income from municipal bonds is often exempt from federal income taxes, and sometimes state and local taxes as well.
4. Mortgage-Backed Securities (MBS): MBS are bonds backed by a pool of mortgage loans. They are issued by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac or private financial institutions. Investors receive payments from the principal and interest generated by the underlying mortgage loans.
5. Zero-Coupon Bonds: These bonds do not pay regular coupon payments. Instead, they are sold at a discount to their face value and pay the full face value at maturity. The return is derived from the difference between the purchase price and the face value.
6. Convertible Bonds: Convertible bonds give bondholders the option to convert their bonds into a predetermined number of the issuer's common stock. This feature provides potential upside if the stock price rises, combining fixed income with potential equity participation.
7. High-Yield Bonds (Junk Bonds): These bonds are issued by companies with lower credit ratings, implying higher risk. Due to the increased risk, they offer higher yields to compensate investors.
The features of bonds can vary in terms of coupon rate, maturity date, credit rating, callability (the issuer's right to redeem the bond before maturity), and convertibility. Investors should consider their risk tolerance, income needs, and investment objectives when choosing among the different types of bonds available in the market.
24. What is market interest rate? Do you think that bond price moves inversely to changes in market interest rate? Justify your answer. 3+7=10
Answer:- The market interest rate, also known as the yield or the prevailing interest rate, is the rate of return required by investors for lending their money in the financial markets. It represents the cost of borrowing or the return expected from an investment.
Regarding the relationship between bond prices and market interest rates, there exists an inverse relationship. When market interest rates rise, the price of existing bonds tends to fall, and vice versa. This phenomenon is known as interest rate risk and can be explained as follows:
1. Bond Coupon Rate: Bonds typically have a fixed coupon rate, which is the interest rate stated on the bond at the time of issuance. This coupon rate remains constant throughout the bond's life. When market interest rates increase, newly issued bonds offer higher coupon rates to attract investors. As a result, existing bonds with lower fixed coupon rates become less attractive, leading to a decrease in their prices.
2. Opportunity Cost: As market interest rates rise, investors can obtain higher returns from newly issued bonds or other investments with higher interest rates. Consequently, the value of existing bonds, which offer lower fixed interest rates, decreases because their cash flows are less valuable in comparison.
3. Yield-to-Maturity: The yield-to-maturity (YTM) is the total return anticipated on a bond if it is held until maturity. As market interest rates rise, the YTM of existing bonds becomes relatively less attractive compared to the higher yields available in the market. Investors demand a discount on existing bonds to compensate for the lower returns they offer compared to newly issued bonds. This discount causes the bond prices to decrease.
4. Bond Duration: The sensitivity of a bond's price to changes in market interest rates is also influenced by its duration. Duration measures the weighted average time it takes to receive the bond's cash flows. Bonds with longer durations are more sensitive to changes in interest rates, meaning their prices will fluctuate more significantly.
It is important to note that while bond prices may move inversely to changes in market interest rates, not all bonds will react in the same manner. The extent of the price change will depend on various factors such as the bond's maturity, coupon rate, call features, credit quality, and market conditions.
Investors should consider interest rate risk when investing in bonds and understand how changes in market interest rates can impact the value of their bond holdings. Diversification, bond laddering, and understanding the specific features of the bonds in their portfolio can help mitigate interest rate risk and manage the impact of changing market interest rates on bond prices.
25. What is technical analysis? Distinguish between technical analysis and fundamental analysis. 4+6=10
Answer:- Technical analysis is a method used to evaluate investments by analyzing historical price and volume data. It focuses on identifying patterns and trends in price charts to predict future price movements.
Differences between technical analysis and fundamental analysis:
1. Approach: Technical analysis relies on historical price and volume data, using charts and indicators to make predictions. Fundamental analysis, on the other hand, evaluates the intrinsic value of an investment by analyzing financial statements, industry trends, and other relevant factors.
2. Data Used: Technical analysis primarily uses price and volume data, along with technical indicators. Fundamental analysis utilizes data such as financial statements, economic indicators, industry reports, and company-specific information.
3. Time Horizon: Technical analysis is often used for short-term trading and timing decisions, focusing on short-term price movements. Fundamental analysis is more suitable for long-term investment decisions, assessing the underlying value of an investment over time.
4. Market Efficiency: Technical analysis assumes that market prices already reflect all available information, analyzing price patterns to make predictions. Fundamental analysis assumes that market prices can deviate from intrinsic value, looking for undervalued or overvalued investments.
In summary, technical analysis uses historical price data and indicators to predict future price movements, while fundamental analysis evaluates the intrinsic value of an investment based on financial and qualitative factors.
26. Discuss constant growth model used valuation of share. Also discuss the advantages of this model. 7+3=10
Answer:- The constant growth model, also known as the Gordon growth model or the dividend discount model (DDM), is a widely used approach for valuing shares of a company. It estimates the value of a share based on the expected future dividends and the required rate of return of the investor.
The formula for the constant growth model is as follows:
V = D / (r - g)
Where:
V = Value of the share
D = Expected dividend per share
r = Required rate of return (or discount rate)
g = Expected constant growth rate of dividends
Advantages of the constant growth model:
1. Simplicity: The constant growth model is relatively simple to use and understand. It requires only a few inputs, such as the expected dividends, discount rate, and growth rate.
2. Dividend Focus: The model places emphasis on dividends, making it particularly suitable for valuing companies that have a consistent dividend payment history or a dividend policy that is expected to continue in the future.
3. Long-Term Perspective: The constant growth model assumes a constant growth rate of dividends, which is more appropriate for valuing companies with stable and mature operations. It is useful for long-term investors who are interested in the potential income generated by dividends.
4. Applicable to Mature Companies: The model is well-suited for valuing established companies that have a history of stable dividend growth. It is commonly used for valuing blue-chip stocks and large, well-established companies.
5. Incorporation of Required Rate of Return: The constant growth model considers the required rate of return of the investor. By factoring in the discount rate, it accounts for the risk and opportunity cost associated with investing in the share.
6. Sensitivity Analysis: The model allows for sensitivity analysis by altering the growth rate or discount rate assumptions. This enables investors to assess the impact of changes in these variables on the valuation of the share.
It's important to note that the constant growth model has some limitations. It assumes a constant growth rate, which may not hold true for all companies. It also assumes that dividends are the primary source of value for investors, disregarding other factors like capital gains. Additionally, the model may not be suitable for valuing companies with irregular dividend patterns or in industries where dividends are not a significant component of shareholder value. Therefore, it is advisable to use the constant growth model in conjunction with other valuation methods to obtain a more comprehensive assessment of a company's worth.
27. What is portfolio return? Explain the process of computing the expected return of a portfolio with two securities with imaginary figures. 4+6=10
Answer:- Portfolio return refers to the overall gain or loss on a portfolio of investments, taking into account the performance of each individual security within the portfolio. It is a measure of the aggregate return earned by an investor on their investment portfolio.
To compute the expected return of a portfolio with two securities, the following steps can be followed:
1. Determine the weights: Assign a weight to each security in the portfolio, representing the proportion of the total portfolio value that each security holds. Let's assume Security A has a weight of 40% and Security B has a weight of 60%.
2. Identify the expected returns: Determine the expected return for each security. Let's assume Security A has an expected return of 8% and Security B has an expected return of 12%.
3. Calculate the weighted returns: Multiply the weight of each security by its respective expected return. For Security A: 40% x 8% = 3.2%. For Security B: 60% x 12% = 7.2%.
4. Sum the weighted returns: Add up the weighted returns calculated in the previous step. 3.2% + 7.2% = 10.4%.
The expected return of the portfolio is 10.4%. This means that, based on the assigned weights and expected returns, the investor can anticipate earning an average return of 10.4% on their portfolio. It's important to note that this calculation assumes a linear relationship between the securities and does not account for other factors like correlations, diversification benefits, or potential risks.
The process outlined above can be extended to portfolios with more than two securities by assigning weights and expected returns to each security, calculating the weighted returns for each security, and summing them to obtain the expected return of the portfolio.
Remember that these figures are imaginary and used solely for the purpose of illustration. In practice, real-world data and expected returns based on thorough analysis and research should be used to compute the expected return of a portfolio.
28. "Mutual fund investment is subject to market risk. Please read the offer documents carefully before investing." In light of this statement, discuss the nature of mutual fund investment and risk involved in it. 10
Answer:- Mutual funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of securities such as stocks, bonds, or a combination of both. The statement "Mutual fund investment is subject to market risk" serves as a disclaimer to highlight that investing in mutual funds involves certain risks. Here are some key points about the nature of mutual fund investment and the risks associated with it:
1. Market Risk: Mutual funds are exposed to market risk, which means that the value of the fund's investments can fluctuate due to changes in market conditions, such as economic factors, interest rates, political events, or investor sentiment. Market risk affects the returns of the mutual fund, and investors may experience losses if the market declines.
2. Diversification: Mutual funds offer diversification by investing in a variety of securities across different asset classes and sectors. Diversification helps reduce the impact of individual security or sector-specific risks. However, it does not eliminate all investment risks, including market risk.
3. Specific Investment Risks: Depending on the type of mutual fund, there may be specific risks associated with the underlying assets. For example, equity funds are exposed to stock market volatility and company-specific risks, while bond funds are subject to interest rate risk, credit risk, and inflation risk.
4. Performance Risk: The performance of a mutual fund is not guaranteed and can vary over time. Past performance is not necessarily indicative of future results. Investors should carefully analyze the historical performance, investment strategy, and other factors before making investment decisions.
5. Liquidity Risk: Mutual funds provide liquidity, allowing investors to buy or sell shares on any business day. However, in certain situations, such as during market downturns or when investing in less liquid assets, there may be challenges in selling fund shares at the desired price or timeframe.
6. Management Risk: Mutual funds are managed by professional fund managers who make investment decisions on behalf of investors. The success of the fund depends on the manager's skills, expertise, and ability to make sound investment choices. Poor management decisions can adversely affect the fund's performance.
7. Regulatory and Legal Risks: Mutual funds operate within a regulatory framework and are subject to compliance with applicable laws. Changes in regulations or legal requirements can impact the fund's operations, investment strategies, or expenses, potentially affecting investor returns.
It is essential for investors to carefully read the offer documents, including the fund's prospectus, which provides detailed information about the investment objectives, strategies, risks, fees, and historical performance of the mutual fund. By understanding the nature of mutual fund investment and the associated risks, investors can make informed decisions and align their investment goals with their risk tolerance and time horizon. Consulting with a financial advisor can also provide valuable guidance in assessing the suitability of mutual funds for individual investment needs.
29. What is a stock exchange? Briefly discuss the functions of the stock exchange. 3+7=10
Answer:- A stock exchange is a regulated marketplace where buyers and sellers come together to trade stocks and other securities. It provides a platform for companies to raise capital by issuing shares to the public and for investors to buy and sell those shares.
Functions of a stock exchange:
1. Facilitating Trading: The primary function of a stock exchange is to facilitate the buying and selling of securities. It provides a centralized marketplace where investors can execute trades efficiently and transparently. The exchange acts as an intermediary, matching buyers with sellers and ensuring fair and orderly transactions.
2. Price Discovery: Stock exchanges play a crucial role in price discovery, determining the market prices of securities. Through continuous buying and selling activity, supply and demand dynamics influence the prices of stocks, enabling investors to assess the fair value of the securities they are interested in.
3. Providing Liquidity: Stock exchanges enhance the liquidity of securities by creating a ready market for investors to buy or sell their holdings. The existence of a liquid market allows investors to convert their investments into cash quickly and efficiently, thereby reducing the risk of holding illiquid securities.
4. Listing and Regulation: Stock exchanges establish listing requirements that companies must meet to have their shares traded on the exchange. These requirements typically include financial reporting obligations, corporate governance standards, and regulatory compliance. By listing on a stock exchange, companies gain access to a wider pool of potential investors.
5. Market Surveillance: Stock exchanges employ market surveillance systems to monitor trading activities and ensure fair and orderly markets. They detect and investigate suspicious trading practices, market manipulation, or insider trading, helping to maintain market integrity and protect investors' interests.
6. Market Data Dissemination: Stock exchanges collect and disseminate market data, including real-time prices, trading volumes, and other relevant information. This data is made available to investors, traders, and other market participants to facilitate informed decision-making and market analysis.
7. Facilitating Capital Formation: Stock exchanges serve as a platform for companies to raise capital by issuing shares to the public through initial public offerings (IPOs) or subsequent offerings. By facilitating capital formation, stock exchanges play a vital role in fostering economic growth, job creation, and entrepreneurship.
Overall, stock exchanges provide a regulated and transparent marketplace where securities can be traded, allowing companies to access capital and investors to participate in the financial markets. They contribute to the efficient functioning of the economy by facilitating capital formation, price discovery, liquidity, and investor protection.
30. What is investors' grievance? Discuss common investor’s grievances in the security market. 3+7=10
Answer:- Investors' grievances refer to complaints or concerns raised by investors regarding their experiences or interactions in the securities market. These grievances can arise from various issues and may reflect a sense of dissatisfaction, misconduct, or violation of investor rights. Here are some common investor grievances in the security market:
1. Misleading Information: Investors may file grievances if they believe they have been provided with false or misleading information about a company, its financials, prospects, or investment products. This could include inaccurate disclosures, misleading advertisements, or deceptive marketing practices.
2. Non-Disclosure or Incomplete Information: Investors have the right to receive complete and accurate information about the securities they invest in. Grievances may arise if important information about the company, its operations, risks, or financials is not disclosed, or if there are delays or errors in the dissemination of such information.
3. Insider Trading: Insider trading refers to the buying or selling of securities based on non-public, material information. If investors suspect or have evidence of insider trading occurring within a company or by individuals associated with the company, they may file grievances to report the violation and seek appropriate action.
4. Market Manipulation: Grievances may be filed if investors believe that market manipulation has occurred, such as artificially inflating or deflating prices, spreading false rumors, or engaging in illegal trading practices that distort the fair and orderly functioning of the market.
5. Non-Receipt of Dividends or Returns: If investors have not received their entitled dividends, interest payments, or returns on their investments within the specified timeframe, they may file grievances to seek redress and investigate the reasons behind the delay or non-payment.
6. Unauthorized Trading or Churning: Investors may have grievances if they discover unauthorized trading in their accounts, where trades have been executed without their consent or knowledge. Excessive trading or churning of an investor's account by a broker or financial advisor to generate excessive commissions may also be a cause for grievances.
7. Non-Compliance with Regulations: Investors can file grievances if they believe that market participants, such as brokers, advisors, or listed companies, have violated regulatory requirements or breached their fiduciary duties. This may include non-compliance with disclosure norms, failure to maintain proper records, or violation of investor protection regulations.
8. Delay in Issue of Securities or Refunds: If investors face undue delays in the issuance of securities they have subscribed to or in receiving refunds for canceled or unsuccessful subscriptions, they may file grievances to address the delay and seek resolution.
It's important for investors to be aware of their rights, read the offer documents and contracts carefully, maintain proper records, and promptly report any grievances they encounter. Regulatory authorities, such as securities commissions or regulatory bodies, often have mechanisms in place to address investor grievances and protect their interests. Investors should reach out to these authorities or seek legal advice if they believe their rights have been violated or if they have concerns about their investments.
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Also Read: AUS Fundamental of Investment Question Paper 2021