Level 1 — RecognitionWhat Markets Are

What Markets Are

⏱ 20 minutes30 marksprintable — key stays hidden on paper

Level 1 — Recognition (MCQ + Matching + True/False with Justification)

Time Limit: 20 minutes Total Marks: 30

Section A — Multiple Choice Questions (1 mark each)

Choose the single best option.

Q1. The primary economic purpose of a financial market is to:

(a) Guarantee profits to all investors
(b) Channel funds from savers to those who need capital
(c) Fix prices of goods and services
(d) Print currency

Q2. "Price discovery" in a market refers to:

(a) The government setting a fixed price
(b) The process by which buyers and sellers together determine an asset's price
(c) A broker hiding the true price
(d) Discounting the price at closing

Q3. Which statement correctly distinguishes an OTC market from a stock exchange?

(a) OTC trades occur on a centralized exchange floor
(b) OTC markets have no dealers
(c) OTC trades are negotiated directly between parties without a centralized exchange
(d) OTC markets are always more liquid

Q4. The two major stock exchanges in India are:

(a) NYSE and NASDAQ
(b) NSE and BSE
(c) LSE and TSE
(d) BSE and NYSE

Q5. The "bid" price is:

(a) The highest price a buyer is willing to pay
(b) The lowest price a seller will accept
(c) The last traded price
(d) The opening price

Q6. A market showing a sustained rise in prices is called a:

(a) Bear market
(b) Sideways market
(c) Bull market
(d) Flat market

Q7. Market capitalization is calculated as:

(a) Share price × total revenue
(b) Share price × number of outstanding shares
(c) Net profit × number of shares
(d) Bid price − ask price

Q8. A ticker symbol / scrip code is used to:

(a) Predict future prices
(b) Uniquely identify a listed security for trading
(c) Rate a company's credit
(d) Set trading hours

Q9. Liquidity of a stock refers to:

(a) Its cash dividend
(b) The ease of buying/selling it without large price impact
(c) The company's water assets
(d) Its total debt

Q10. NASDAQ is best known as:

(a) A commodity exchange in India
(b) A largely electronic exchange in the US
(c) The London stock exchange
(d) A bond-only exchange

Section B — Matching (1 mark each, Q11 total 5 marks)

Q11. Match each exchange in Column A with its country/city in Column B.

Column A	Column B
(i) NSE	(P) London
(ii) NYSE	(Q) Tokyo
(iii) LSE	(R) India (Mumbai)
(iv) TSE	(S) New York
(v) NASDAQ	(T) United States (electronic)

Section C — True/False WITH Justification (2 marks each: 1 mark answer + 1 mark reason)

Q12. The bid-ask spread is the difference between the highest bid and the lowest ask. (T/F + justify)

Q13. A large-cap company always has a smaller market capitalization than a small-cap company. (T/F + justify)

Q14. Higher liquidity generally means narrower bid-ask spreads. (T/F + justify)

Q15. Because of time-zone differences, NYSE and NSE regular trading hours overlap completely. (T/F + justify)

Q16. In a bear market, prices are generally falling. (T/F + justify)

Q17. A stock exchange only functions if it has a physical trading floor. (T/F + justify)

End of Paper

Answer keyMark scheme & solutions

Section A (10 marks)

Q1 — (b) [1] Financial markets intermediate between surplus units (savers) and deficit units (borrowers/firms), enabling efficient allocation of capital. Guaranteeing profits (a) is false; markets involve risk.

Q2 — (b) [1] Price discovery is the aggregation of buyer/seller information into a market-clearing price through the order-matching process.

Q3 — (c) [1] OTC = decentralized, dealer/party-negotiated trades; exchanges are centralized and standardized. Hence (c). (a),(b),(d) contradict definitions.

Q4 — (b) [1] NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) are India's two main exchanges.

Q5 — (a) [1] Bid = highest price a buyer offers; ask = lowest price a seller demands.

Q6 — (c) [1] Sustained rising prices/optimism = bull market.

Q7 — (b) [1] Market cap = current share price × number of outstanding shares.

Q8 — (b) [1] A ticker/scrip code is a unique identifier for a listed security.

Q9 — (b) [1] Liquidity = ability to trade quickly at stable prices with minimal impact.

Q10 — (b) [1] NASDAQ is a predominantly electronic US exchange (tech-heavy).

Section B (5 marks)

Q11 [1 each]

(i) NSE → (R) India (Mumbai)
(ii) NYSE → (S) New York
(iii) LSE → (P) London
(iv) TSE → (Q) Tokyo
(v) NASDAQ → (T) United States (electronic)

Section C (12 marks)

Q12 — TRUE [1] Justification [1]: Spread = lowest ask − highest bid (equivalently the gap between best bid and best ask). It represents transaction cost. Full credit if student states spread = best ask − best bid.

Q13 — FALSE [1] Justification [1]: By definition large-cap firms have larger market capitalization than small-cap firms; the statement reverses the relationship.

Q14 — TRUE [1] Justification [1]: More buyers/sellers and higher volume reduce the gap between bid and ask, so liquid stocks have narrow spreads while illiquid ones have wide spreads.

Q15 — FALSE [1] Justification [1]: NSE (IST, ~09:15–15:30) and NYSE (ET) are many hours apart; regular sessions do not overlap completely (there may be little or partial overlap depending on daylight rules).

Q16 — TRUE [1] Justification [1]: A bear market is characterized by generally declining prices and pessimism (commonly ~20% fall from peak).

Q17 — FALSE [1] Justification [1]: Modern exchanges operate electronically (e.g., NSE, NASDAQ); a physical floor is not required to match orders.

Sample market-cap illustration (for Q7 verification)

If price = ₹250 and outstanding shares = 4,00,00,000, then Market Cap = 250 × 40,000,000 = ₹10,00,00,00,000 (₹1,000 crore).

Sample spread illustration (for Q12 verification)

If best bid = ₹99.80 and best ask = ₹100.00, spread = 100.00 − 99.80 = ₹0.20.

[
  {"claim":"Market cap = price x shares = 250 x 40,000,000 = 10,000,000,000","code":"price=250; shares=40000000; result=(price*shares==10000000000)"},
  {"claim":"Bid-ask spread = ask - bid = 100.00 - 99.80 = 0.20","code":"from sympy import Rational; bid=Rational('99.80'); ask=Rational('100.00'); result=(ask-bid==Rational('0.20'))"},
  {"claim":"Bear market threshold example: a 20% fall from 5000 gives 4000","code":"peak=5000; result=(peak*(1-Rational(20,100))==4000)"}
]