Level 2 — RecallWhat Markets Are

What Markets Are

40 marksprintable — key stays hidden on paper

Level 2 Test Paper (Recall & Standard Problems)

Time: 30 minutes Total Marks: 40

Answer all questions. Show working for numerical problems. Use $...$ for any math.

Q1. Define a financial market and state its primary economic purpose. (3 marks)

Q2. Explain the two core functions of a stock market: capital allocation and price discovery. Give one line each. (4 marks)

Q3. State any three differences between a stock exchange and an over-the-counter (OTC) market. (3 marks)

Q4. Name the two principal stock exchanges of India and briefly state the role each plays. (4 marks)

Q5. Match each global exchange to its country/city: NYSE, NASDAQ, LSE, TSE. (4 marks)

Q6. Define liquidity and explain in one line why it matters to an investor. (3 marks)

Q7. A company has $2{,}00{,}00{,}000$ (2 crore) shares outstanding, each trading at $\text{₹}750$ . (a) Calculate its market capitalization. (b) State which cap category it likely falls under (large / mid / small / micro), assuming the large-cap threshold is ₹20,000 crore. (4+2 = 6 marks)

Q8. For a stock the best bid is $\text{₹}248.50$ and the best ask is $\text{₹}249.10$ . (a) Calculate the bid–ask spread. (b) Calculate the spread as a percentage of the ask price (2 d.p.). (2+3 = 5 marks)

Q9. Define a ticker symbol / scrip code and give one example each of a ticker (NSE/NYSE style) and a numeric scrip code (BSE style). (4 marks)

Q10. Define bull, bear, and sideways markets in one line each. (4 marks)

End of paper.

Answer keyMark scheme & solutions

Q1. (3 marks)

A financial market is a marketplace/system where buyers and sellers trade financial assets (shares, bonds, currencies, derivatives). (2)
Its economic purpose: to channel savings from surplus units (investors) to deficit units (firms/governments) that need capital, enabling efficient allocation of funds. (1)

Q2. (4 marks)

Capital allocation: directs money towards the most productive/promising companies via investor demand for their shares. (2)
Price discovery: the continuous interaction of buy and sell orders establishes a fair market price reflecting all available information. (2)

Q3. (3 marks) — 1 mark each (any three):

Exchange is centralized/regulated; OTC is decentralized/dealer network.
Exchange trades standardized listed securities; OTC trades customized/unlisted instruments.
Exchange has transparent public prices; OTC prices negotiated bilaterally.
Exchange has central clearing/counterparty; OTC has counterparty risk.

Q4. (4 marks)

NSE (National Stock Exchange): India's largest exchange by volume; fully electronic; flagship index NIFTY 50. (2)
BSE (Bombay Stock Exchange): oldest exchange in Asia (1875); flagship index SENSEX. (2)

Q5. (4 marks) — 1 mark each:

NYSE → New York, USA
NASDAQ → New York, USA (electronic)
LSE → London, UK
TSE → Tokyo, Japan

Q6. (3 marks)

Liquidity = the ease with which an asset can be bought or sold quickly without significantly affecting its price. (2)
It matters because high liquidity means lower transaction cost, tighter spreads, and easy entry/exit. (1)

Q7. (6 marks) (a) Market cap = shares × price = $2{,}00{,}00{,}000 \times 750 = \text{₹}1{,}50{,}00{,}00{,}000$ (2) = ₹150,00,00,000 = ₹1,500 crore. (2) (b) ₹1,500 crore < ₹20,000 crore threshold → not large cap; at ₹1,500 crore it falls in the small-cap range (well below mid/large). (2)

Q8. (5 marks) (a) Spread = ask − bid = $249.10 - 248.50 = \text{₹}0.60$ . (2) (b) % spread = $\dfrac{0.60}{249.10}\times100 = 0.2409\% \approx \mathbf{0.24\%}$ . (3)

Q9. (4 marks)

A ticker symbol / scrip code is a unique short code identifying a listed security for trading. (2)
Example ticker: e.g. RELIANCE (NSE), AAPL (NYSE/NASDAQ). (1)
Example numeric scrip code (BSE): e.g. 500325 (Reliance). (1)

Q10. (4 marks) — 1 mark each + 1 for completeness:

Bull market: sustained rising prices, optimistic sentiment.
Bear market: sustained falling prices (typically ≥20% decline), pessimistic sentiment.
Sideways market: prices move within a range with no clear up/down trend.
Correct all three clearly: full 4.

[
  {"claim":"Q7a market cap = 1500 crore", "code":"shares=200_00_000; price=750; mc=shares*price; result = (mc == 150_00_00_000) and (mc/1e7 == 1500)"},
  {"claim":"Q7b 1500 crore is below 20000 crore large-cap threshold", "code":"mc_cr=1500; result = mc_cr < 20000"},
  {"claim":"Q8a spread = 0.60", "code":"ask=Rational('249.10'); bid=Rational('248.50'); result = (ask-bid == Rational('0.60'))"},
  {"claim":"Q8b percent spread approx 0.24", "code":"ask=Rational('249.10'); bid=Rational('248.50'); pct=(ask-bid)/ask*100; result = (round(float(pct),2) == 0.24)"}
]