IGNOU FREE MMPF-007 Equity Markets Solved Guess Paper 2025

✅ Q1. Explain the meaning, structure and importance of Financial Markets.

Financial market is a mechanism through which buyers and sellers of financial assets such as shares, debentures, bonds, bills and derivatives interact to determine prices and facilitate transfer of funds. It acts as a bridge between savers and investors by channelising surplus funds into productive uses. The structure of financial markets consists broadly of money market and capital market. Money market deals in short-term funds and instruments such as treasury bills, commercial papers and call money, while capital market deals in long-term funds and instruments such as equity shares, debentures and bonds. The capital market is further divided into primary market, where new securities are issued, and secondary market, where existing securities are traded. Financial markets also include organised exchanges and over-the-counter markets. The importance of financial markets in an economy is extremely high as they promote capital formation, economic growth and investment culture. They provide liquidity to investors by enabling easy buying and selling of securities. They help in price discovery through demand and supply forces. Financial markets encourage savings by offering a variety of investment instruments. They improve allocation of resources by directing funds to productive sectors. They support industrial development and entrepreneurship. They also help government raise funds for development through public borrowings. In modern economies, financial markets play a vital role in integrating domestic economy with global markets. Therefore, financial markets are the backbone of the financial system and a key driver of economic development.

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✅ Q2. Discuss the functioning and importance of the Primary Market.

The primary market is the segment of the capital market where new securities are issued by companies and governments directly to investors for the first time. It is also known as the new issue market. In the primary market, companies raise fresh capital by issuing equity shares, preference shares and debentures. The main methods of issuing securities in the primary market include public issue through IPO, rights issue, private placement, preferential allotment and bonus issue. The process of primary market issue involves preparation of prospectus, approval from regulatory authorities, appointment of intermediaries such as merchant bankers, underwriters and bankers to the issue, marketing of the issue and allotment of securities. The importance of the primary market lies in capital formation and resource mobilisation. It enables companies to raise long-term funds for expansion, diversification and modernisation. It helps new companies enter the capital market. It supports entrepreneurship and industrial growth. For investors, it provides opportunities to invest in new projects and earn capital appreciation. The primary market also plays a vital role in economic development by directing savings into productive investment. It improves corporate transparency and governance through disclosure requirements. Without a strong primary market, economic growth would slow down due to lack of capital for industries. Therefore, the primary market is the foundation of the capital market and a crucial source of long-term finance.

✅ Q3. Explain the role and functions of the Secondary Market.

The secondary market is the segment of the capital market where existing securities are bought and sold among investors after being issued in the primary market. It is also known as the stock market or stock exchange. The secondary market provides liquidity to financial securities by allowing investors to convert their investments into cash whenever required. The main functions of the secondary market include providing liquidity, price discovery, continuous marketability, safety of transactions and mobilisation of savings. It helps determine the market price of securities through free interaction of demand and supply. It promotes transparency and fairness in trading through regulatory supervision. The secondary market encourages new investments because investors feel confident that they can exit easily. It reflects the economic health of the country as stock prices respond quickly to economic developments. The importance of the secondary market is extremely high for both companies and investors. For companies, it improves investor confidence and market reputation. For investors, it provides opportunities for capital gains and portfolio diversification. The secondary market also improves allocation of capital by shifting funds from less productive to more productive companies. It supports development of financial institutions, mutual funds and pension funds. Therefore, the secondary market is a vital component of the equity market system and an essential institution for efficient functioning of the capital market.

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✅ Q4. Explain the concept and methods of Equity Share Valuation.

Equity share valuation refers to the process of estimating the intrinsic value of a share based on its expected future earnings, dividends and growth prospects. It helps investors determine whether a share is undervalued, overvalued or fairly valued. The main objective of valuation is to make rational investment decisions. The major methods of equity valuation include the dividend discount model, earnings capitalization model, price-earnings ratio method and asset-based valuation method. Under the dividend discount model, the value of a share is equal to the present value of expected future dividends. Under the earnings capitalization method, value is determined by capitalising expected earnings at a desired rate of return. The P/E ratio method values a share on the basis of market price in relation to earnings per share. The asset-based method values the share on the basis of net assets of the company. The importance of equity valuation is extremely high because it helps investors select profitable shares and avoid speculation. It supports portfolio construction and wealth maximisation. It helps financial managers in decisions related to mergers, acquisitions and restructuring. It improves market efficiency by promoting rational pricing. Without proper valuation, investment decisions become speculative and risky. Therefore, equity share valuation is a core function of security analysis and a foundation of sound investment strategy.

✅ Q5. Discuss the special issues and challenges in Equity Markets.

Equity markets face several special issues and challenges due to globalisation, technology, regulation and investor behaviour. One major challenge is market volatility caused by economic uncertainty, geopolitical tensions, interest rate changes and global financial shocks. Speculation and herd behaviour lead to price bubbles and crashes. Insider trading and market manipulation threaten investor confidence and market integrity. Cybersecurity risks and digital fraud have increased due to online trading platforms. Small investors often lack financial literacy and become victims of misinformation and rumours. Regulatory compliance and frequent policy changes also affect market stability. Liquidity problems may arise in mid-cap and small-cap stocks. Global integration has exposed domestic markets to international capital flows and sudden foreign fund withdrawals. Despite these challenges, equity markets also offer vast opportunities for wealth creation, capital formation and economic growth. Therefore, strong regulation, investor education, transparency, technology security and ethical practices are essential for sustainable development of equity markets.

✅ Q6. Explain the concept and importance of Market Index in Equity Markets.

A market index is a statistical measure that reflects the overall performance of a selected group of stocks representing a particular market or sector. It is constructed by selecting a sample of representative companies and calculating changes in their prices over time using a base year. Popular indices represent the overall movement of equity markets and act as barometers of market sentiment. The concept of a market index is based on the idea of tracking market trends, investor confidence and economic direction through a single numerical indicator. Market indices may be broad-based, sector-specific or thematic depending on the group of stocks included. The importance of the market index in equity markets is extremely high because it provides a quick snapshot of market performance. Investors use indices to assess whether the market is bullish or bearish. It helps in comparing the performance of individual stocks and mutual funds against overall market performance. Fund managers use indices as benchmarks for portfolio performance evaluation. Market indices also help policymakers, analysts and economists track economic trends and investment climate. For retail investors, indices provide direction for investment timing and asset allocation decisions. Market indices also support the growth of passive investment products such as index funds and ETFs. They improve transparency and efficiency of the stock market by providing continuous information flow. Without market indices, investors would find it difficult to interpret large volumes of market data. Therefore, market indices play a crucial role in guiding investment decisions, measuring market performance and improving the efficiency of equity markets.

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✅ Q7. Discuss the concept and role of Listing of Securities in Equity Markets.

Listing of securities refers to the formal admission of a company’s securities for trading on a recognised stock exchange. Once a company is listed, its shares can be freely bought and sold by investors in the secondary market. Listing requires the company to comply with a set of rules, regulations and disclosure norms prescribed by the stock exchange and regulatory authorities. The concept of listing is based on transparency, liquidity and investor protection. The role of listing in equity markets is highly significant because it provides liquidity to investors by enabling easy trading of shares. It enhances the credibility and market image of the company. Listed companies can raise capital more easily in future through public issues and rights issues. Listing promotes transparency because companies are required to disclose financial results, corporate actions and material information regularly. It strengthens corporate governance and accountability. Listing also helps in proper price discovery through demand and supply forces in the secondary market. For investors, listing ensures safety of transactions and regulatory protection. Unlisted securities carry higher risk and low liquidity. Therefore, listing is essential for the development of an efficient and transparent equity market. It bridges the primary market with the secondary market and provides long-term sustainability to capital market operations.

✅ Q8. Explain the concept and significance of Derivatives in Equity Markets.

Derivatives are financial instruments whose value is derived from the value of an underlying asset such as equity shares, stock indices, commodities, currencies or interest rates. Common types of equity derivatives include futures, options and index derivatives. Futures are standardised contracts to buy or sell an asset at a future date at a predetermined price. Options give the right but not the obligation to buy or sell an asset at a specified price within a specified period. The significance of derivatives in equity markets is very high because they provide powerful tools for risk management, speculation and price discovery. Investors use derivatives to hedge against price fluctuations and protect their portfolios from market risk. Traders use derivatives for speculative gains due to low margin requirements and high leverage. Derivatives improve market liquidity and trading volume. They also improve price efficiency by linking spot and futures markets. Institutional investors and fund managers use derivatives to manage portfolio risk and rebalance asset allocation. However, derivatives also involve high risk due to leverage, volatility and complexity. Misuse of derivatives can lead to heavy losses and financial instability. Therefore, proper regulation and investor awareness are essential. Despite these risks, derivatives have become an integral part of modern equity markets and play a crucial role in risk management, liquidity creation and market efficiency.

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✅ Q9. Discuss the concept and importance of Insider Trading Regulations in Equity Markets.

Insider trading refers to the buying or selling of securities by individuals who possess unpublished price-sensitive information about a company. Such information may relate to mergers, acquisitions, financial results, dividends or major business decisions. Insider trading is considered unethical and illegal because it gives unfair advantage to insiders at the cost of ordinary investors and distorts market fairness. Insider trading regulations are designed to prevent misuse of confidential information and protect investor interests. These regulations require insiders such as directors, promoters and key employees to disclose their transactions and restrict trading during sensitive periods. The importance of insider trading regulations in equity markets is extremely high because they promote fairness, transparency and investor confidence. They ensure that all investors have equal access to information. They prevent market manipulation and artificial price movements. Strong insider trading laws improve the credibility and integrity of capital markets. They encourage public participation and foreign investment by reducing information asymmetry. Weak enforcement of insider trading laws leads to loss of investor trust and market instability. Therefore, strict insider trading regulations are essential for maintaining ethical standards, protecting small investors and ensuring the healthy growth of equity markets.

✅ Q10. Explain the role of Investor Protection and Investor Education in Equity Markets.

Investor protection refers to the set of rules, regulations and institutional mechanisms designed to safeguard the interests of investors in equity markets. It includes protection against fraud, manipulation, misleading information, unfair practices and default risks. Investor education refers to the process of spreading awareness, financial literacy and understanding of investment risks and returns among investors. The importance of investor protection in equity markets is extremely high because a large number of small investors participate in stock markets with limited knowledge. Strong investor protection builds confidence and encourages wider participation. It ensures transparency in disclosures, fairness in trading and safety of transactions. Investor education empowers individuals to make informed investment decisions and avoid speculation and fraud. It helps investors understand market risks, valuation methods, mutual funds, derivatives and long-term wealth creation. Investor education reduces herd behaviour and emotional trading. It supports stable and rational market growth. Regulators, stock exchanges and financial institutions play an important role in investor protection and education through grievance redressal systems, awareness campaigns and training programmes. Without adequate investor protection and education, equity markets become vulnerable to scams, bubbles and crashes. Therefore, investor protection and education are fundamental pillars for the sustainable development, stability and credibility of equity markets.

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