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NISM-Series-XV: Research Analyst · Terminology in Equity and Debt Markets

Basics of Equity Markets and Instruments for NISM Research Analyst

Updated 11 October 2026 · Fact-checked

Equity markets are where company shares are issued and traded. The primary market issues new securities (IPO, FPO, rights issue) and money goes to the company. The secondary market trades existing shares on exchanges and money goes to the selling investor. Solve questions by identifying who receives the money and which instrument is described.

Understand Basics of Equity Markets and Instruments

A share represents part ownership of a company. The holder is an owner, not a lender. Owners share in profits through dividends and in price gains, and they bear the risk if the company does badly.

The primary market is where a company raises fresh capital by issuing new securities. Common routes are an Initial Public Offer (IPO), a Further Public Offer (FPO), a rights issue and a private placement. Money flows from investors to the issuer. An IPO is the first time an unlisted company offers shares to the public and gets listed.

The secondary market is where already issued shares change hands between investors, mostly on stock exchanges such as NSE and BSE. The company does not receive the sale money. The secondary market gives liquidity and price discovery, which is why investors are willing to buy in the primary market.

Share types: equity shares carry voting rights and get dividends only after preference shareholders. Preference shares usually get a fixed dividend and priority over equity in dividend and in repayment on winding up, but generally have no ordinary voting rights. A rights issue offers new shares to existing shareholders in proportion to their holding, often at a discount. Other terms you should know: bonus shares (free shares from reserves), stock split (face value reduced, number of shares rises) and depository receipts.

Participants include issuers, investors, merchant bankers (lead managers), registrars, stock exchanges, brokers, depositories (NSDL, CDSL), clearing corporations and the regulator SEBI. Indices such as Nifty 50 and Sensex are baskets of stocks that show the market or sector movement. Most Indian indices are free-float market-capitalisation weighted.

Key formulas to remember

Market capitalisation
Market cap = Share price × Number of shares outstanding
Free-float market cap uses only shares available for public trading, not promoter holdings.
Primary vs secondary: who gets the money
Primary: money to issuer | Secondary: money to selling investor
The most tested distinction.
Rights entitlement
New shares offered = Existing shares × Rights ratio
For example, a 1:4 ratio means one new share for every four held.
Stock split effect
New face value = Old face value ÷ Split factor; New number of shares = Old number × Split factor
Total share capital and market cap do not change by the split itself.

How to solve Basics of Equity Markets and Instruments questions

Use this sequence for any terminology or instrument question in this topic.

  1. 1Read the question stem and underline the key clue: new issue or existing shares, issuer or investor, ownership or loan.
  2. 2Decide the market: primary if fresh securities are created and the company receives funds; secondary if shares are traded between investors.
  3. 3Identify the instrument: equity, preference, rights, bonus, split, IPO, FPO or depository receipt.
  4. 4Recall its defining feature, such as voting rights, fixed dividend, proportional offer to existing holders, or free issue from reserves.
  5. 5For participant questions, match the role: registrar handles applications and allotment records, depository holds shares in electronic form, clearing corporation guarantees settlement.
  6. 6For calculations, write the formula first and then substitute numbers.
  7. 7Eliminate options that are absolute or reverse the facts, then choose the best remaining option.

Quickest way: Money-flow and keyword shortcut

When to use it: Use for definition and classification MCQs when time is short.

  1. Ask: does the company receive the money? If yes, primary market. If no, secondary.
  2. Spot keywords: 'existing shareholders in proportion' means rights issue; 'free' means bonus; 'face value reduced' means split; 'first time public' means IPO.
  3. Preference means priority and fixed dividend; equity means ownership, voting and residual claim.
  4. Discard options that contradict these anchors and pick the one left.

Common mistakes in Basics of Equity Markets and Instruments

  • Saying the company receives money when shares are bought on the exchange.

    Students think any share purchase funds the company.

    Fix: Only primary market purchases fund the issuer. Exchange trades pay the seller.

  • Treating a bonus issue as a way of raising capital.

    Both create new shares.

    Fix: A bonus issue capitalises reserves and brings no fresh cash in.

  • Believing a stock split changes the company's market value.

    The share price falls after a split.

    Fix: The number of shares rises in the same proportion, so total value is unchanged by the split itself.

  • Assuming preference shareholders always vote like equity holders.

    Both are called shareholders.

    Fix: Preference shareholders generally lack ordinary voting rights, though they get priority in dividend and repayment.

  • Confusing an IPO with an FPO.

    Both are public offers.

    Fix: An IPO is by an unlisted company for the first time. An FPO is by an already listed company.

  • Mixing up a rights issue with a public issue.

    Both raise capital from shareholders or investors.

    Fix: A rights issue is offered only to existing shareholders in proportion to their holding.

Worked examples

Example 1

A listed company offers 1 new share for every 5 shares held. A shareholder holds 1,000 shares. How many new shares can the shareholder subscribe to, and which type of issue is this?

Show the solution
  1. The offer is made only to existing shareholders in proportion to holding, so it is a rights issue.
  2. The ratio is 1:5, so entitlement = 1,000 × 1 ÷ 5 = 200 shares.
  3. The company receives money from the subscription, so this is a primary market activity.

Answer: 200 new shares; it is a rights issue in the primary market.

Example 2

A company has 10 crore shares of face value ₹10 and a market price of ₹500. It announces a 1:5 stock split (each ₹10 share becomes five shares). What are the new face value, number of shares and market capitalisation, assuming market value is unchanged by the split?

Show the solution
  1. New face value = ₹10 ÷ 5 = ₹2.
  2. New number of shares = 10 crore × 5 = 50 crore.
  3. Market cap before = 10 crore × ₹500 = ₹5,000 crore.
  4. Theoretical price after = ₹500 ÷ 5 = ₹100, so market cap = 50 crore × ₹100 = ₹5,000 crore.

Answer: Face value ₹2, 50 crore shares, market cap unchanged at ₹5,000 crore.

Exam tips

  • Expect direct definition questions, so learn one-line definitions for each instrument and issue type.
  • Watch for trap options that swap primary and secondary market, or rights and bonus issue.
  • Remember that Nifty 50 and Sensex are index names, and know that indices are mostly free-float weighted.
  • Under negative marking of 25% of the question's marks, skip a question only if you cannot remove at least two options.

Practice questions from Terminology in Equity and Debt Markets

Basics of Equity Markets and Instruments in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Basics of Equity Markets and Instruments: frequently asked questions

What is the difference between primary market and secondary market?

In the primary market, a company issues new securities and receives the money. In the secondary market, investors trade existing securities with each other on exchanges. The issuer gets no money from secondary trades.

What are the main types of equity shares in India?

The main types are equity shares and preference shares. Equity shares carry voting rights and residual returns. Preference shares have priority in dividend and repayment, usually at a fixed rate.

Is a rights issue the same as an IPO?

No. An IPO is the first public offer by an unlisted company. A rights issue is offered only to existing shareholders in proportion to their holdings.

Is negative marking applicable in NISM Series XV?

Yes. Wrong answers carry negative marking of 25% of the marks assigned to the question. The exam has 100 marks, 2 hours and a pass mark of 60%.