NISM Series VII – Securities Operations and Risk Management: Chapter 1 – Introduction to the Securities Market
If you are preparing for the NISM Series VII Securities Operations and Risk Management (SORM) exam, this is your complete short note for Chapter 1. This guide covers the structure of financial markets, types of securities, and key market products — everything you need to know for your NISM VII exam preparation.
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What Are Financial Markets?
Financial markets are platforms that allow the efficient transfer and allocation of financial resources for productive activities in the economy. Their core purpose is to enable economic activity by giving access to funds for consumption or production. These markets aggregate savings from many investors and channel them toward productive uses.
Two critical functions of financial markets are:
- Providing liquidity to investors (the ability to buy or sell assets easily)
- Offering exit options so investors can withdraw their funds when needed
Financial market regulators and regulations focus on creating systems and processes that streamline fund transfers and protect investor interests.
What Is a Security?
A security is a financial instrument that represents a claim (return or share of profits) from the user of funds. Securities markets help transfer resources from those with surplus funds to those with a productive need for capital.
In formal terms: Securities markets provide channels for allocating savings to investments, thereby decoupling the act of saving from the act of investing.
Structure of the Financial Market
The financial market is broadly divided into two segments:
1. Money Market
The money market is a market for short-term financial instruments that are close substitutes for money (also called cash equivalents). It deals in instruments with a maturity period of one year or less.
Common money market instruments include:
- Treasury Bills (T-bills)
- Commercial Papers
- Certificates of Deposit (CDs)
- Bankers' Acceptances
- Repos (Repurchase Agreements)
- Government Securities
The money market is divided into the Organised Money Market (short-term lending/borrowing) and the Unorganised Money Market (money lenders and indigenous bankers).
2. Securities Market (Capital Market)
The securities market is split into:
- Primary Market: Where issuers raise fresh capital from investors through IPOs (Initial Public Offers), FPOs (Follow-on Public Offers), and Rights Issues.
- Secondary Market: Where previously issued securities are traded among investors, providing liquidity.
Primary Market vs Secondary Market – Key Differences
| Feature | Primary Market | Secondary Market |
|---|---|---|
| Purpose | Fresh capital raising | Trading of existing securities |
| Participants | Issuers + Investors | Buyers + Sellers |
| Methods | IPO, FPO, Rights Issue, Private Placement | Stock Exchange, OTC |
| Price | Fixed or through book building | Determined by demand and supply |
Types of Primary Market Issues
- Public Issue (IPO/FPO): Open to all investors
- Private Placement: Offered to a select group of investors
- Rights Issue: Fresh shares issued to existing shareholders at a specific price
- Bonus Issue / Stock Split: Shares issued to existing shareholders at no cost
Secondary Market Trading Routes
- OTC (Over-the-Counter) Markets: Informal markets where trades are negotiated and settled bilaterally between parties
- Stock Exchange Route: Formal, regulated platform where trading and settlement are conducted through exchanges; buyers and sellers do not know each other
Products Traded in the Indian Securities Market
Understanding the instruments traded is a key topic in the NISM SORM exam syllabus. Here is a complete overview:
Equity Instruments
- Equity Shares: Represent fractional ownership in a company. Equity shareholders collectively own the company and share in its profits and losses.
- Warrants: Give the investor the right (not obligation) to purchase equity shares at a specified price after a defined time period.
Debt Instruments
- Debentures: Instruments used by companies to raise debt. In India, debentures are typically secured by tangible assets.
Collective Investment Instruments
- Mutual Funds: Investment vehicles that pool money from many investors sharing a common investment objective and invest it in a diversified portfolio of securities.
- Exchange Traded Funds (ETFs): Funds that invest in all or a representative sample of securities included in a specific index. ETFs are traded on stock exchanges like regular shares.
Special Instruments
- Indian Depository Receipts (IDR): Foreign companies cannot list directly on Indian stock exchanges. However, they can raise capital in Indian currency through IDRs — instruments representing their underlying shares.
Derivative Market and Its Products
A derivative is a financial contract whose value is derived from an underlying asset, index, or reference rate. This is a critical topic for the NISM Series VII SORM certification exam.
Types of Derivative Contracts
- Forward Contract: A private agreement to buy or sell an asset on a future date at a predetermined price. Not standardised; traded OTC.
- Futures Contract: A standardised, exchange-traded agreement to buy or sell an asset at a set price on a future date. Both parties are obligated to honour the contract.
- Options: Give the buyer the right but NOT the obligation to buy (Call Option) or sell (Put Option) an asset at a predetermined price on or before the expiry date.
- Swaps: Contracts where two counterparties exchange cash flows based on different financial instruments (e.g., interest rate swaps, currency swaps).
Derivatives Traded in India
- Index Futures and Options
- Stock Futures and Options
- Currency Derivatives
- Interest Rate Derivatives
- Derivatives on Foreign Stock Indices
- Commodity Derivatives
- Interest Rate Futures / Bond Futures
Debt Market and Its Products
The debt market enables financing through the issuance of bonds and debentures. In India, the debt market has two major segments:
Government Securities Market (G-Sec Market)
The government raises money to fund essential services (law and order, defence, infrastructure) through borrowing from banks and financial institutions by issuing government securities (G-secs).
Corporate Bond Market
Companies raise capital through corporate bonds, commercial papers, T-bills, and certificates of deposit. Corporate bonds are issued either through public offerings or private placements and are used for expansion, modernisation, mergers, and acquisitions.
Other Asset Classes – REITs, InvITs, and Sovereign Gold Bonds Real Estate Investment Trusts (REITs)
REITs are trusts registered with SEBI that invest in commercial real estate assets. They hold assets on a freehold or leasehold basis, either directly or through holding companies and special purpose vehicles (SPVs).
Infrastructure Investment Trusts (InvITs)
InvITs are SEBI-registered trusts that invest in infrastructure projects. They can raise funds through public issues or private placements.
Sovereign Gold Bonds (SGBs)
Launched in 2015, SGBs are government securities denominated in grams of gold — an alternative investment route for gold exposure without holding physical gold.
- Issued in denominations of 1 gram of gold
- Tenor of 8 years
- Purchased and redeemed in Indian Rupees
Quick Revision – Key Points for NISM VII Exam
- The primary market raises fresh capital; the secondary market provides liquidity.
- Money market instruments have a maturity of 1 year or less.
- A Forward contract is OTC and non-standardised; a Futures contract is exchange-traded and standardised.
- Options give the right but not obligation; Futures create an obligation for both parties.
- REITs invest in real estate; InvITs invest in infrastructure — both are SEBI-registered.
- SGB tenor is 8 years; denominated in grams of gold; bought and redeemed in Rupees.
- IDRs allow foreign companies to raise capital in India without direct listing.
📌 Continue your NISM Series VII SORM preparation with the next chapter: Market Participants in the Securities Market.
👉 Take a free mock test on PassNISM.in to test your understanding of Chapter 1 concepts.
Related reads: NISM Series VII Syllabus | NISM SORM Mock Test | NISM Exam Registration Guide