NISM Series SEBI-ICE · Chapter 5: Investment in Securities Market

L1 · Foundation

Foundation — Risks, accounts, primary and secondary markets

The seven types of risk and how to mitigate them, the three accounts you need, KYC under the PMLA, the primary market and ASBA, the secondary market, order placement, the settlement cycle, margin and pledge, contract notes and the Basic Services Demat Account.

28 min read · Worth 20% of the paper · Written from pages 23–37 of the official NISM workbook · Updated 18 September 2026

Chapter 5 — Investment in Securities Market (Part 1)

This is the longest chapter in the booklet and carries the most weight. It opens with a warning that sets the tone:

5.1 The seven types of risk

Learn all seven. Questions are built by asking which risk a described situation is.

	Risk	The booklet's definition
i	Market risk or Systematic Risk	"An investor may experience losses due to factors affecting the overall performance of financial markets and macroeconomic factors. Stock market bubbles and crashes are good examples."
ii	Unsystematic Risk	"the uncertainty inherent in a particular company or industry. Examples include a new competitor, a regulatory change that could drive down company sales, a shift in management, a product recall."
iii	Inflation risk	"also called purchasing power risk, is the chance that the cash flows from an investment won't be worth as much in the future as they are today because of a decline in its purchasing power."
iv	Liquidity risk	"arises when an investment cannot be bought or sold or converted into cash quickly enough to prevent or minimize a loss or to meet any immediate expense. You can minimize this risk to a great extent by diversifying your investments."
v	Business Risk	"the risk that a business might stop its operations due to any unfavourable market or financial situation."
vi	Volatility Risk	"the risk when the stock prices of a company may fluctuate, EVEN WHEN those companies aren't in danger of failing."
vii	Currency Risk	"the possibility of losing money due to unfavourable movements in exchange rates... investors who have assets across national borders are exposed to this risk."

Two distinctions to hold firmly:

Systematic versus unsystematic. Systematic risk hits the whole market — a crash, a macroeconomic shock — and no amount of diversification escapes it. Unsystematic risk hits one company or one industry — a product recall, a new competitor — and that is exactly the risk diversification removes.

Volatility versus business risk. Volatility is the price moving even when the company is perfectly healthy. Business risk is the company actually stopping operations. A share that falls 30% in a bad quarter and recovers is volatility; a company that shuts its factory is business risk.

5.2 How to mitigate risk

Four mitigations, then: asset allocation and diversification, SIP or buying in smaller lots, understanding fundamentals, and ignoring rumours and unsolicited messages.

That last one has aged into the most important line in the chapter. The "unsolicited message" of 2020 is today a Telegram group promising daily profits, a WhatsApp forward from an "expert", or a stranger who adds you to a group full of screenshots. SEBI has repeatedly cautioned against exactly these, and Chapter 11 deals with them in full.

5.3 Primary and secondary markets — the core distinction

And on tax: "Investments in securities market are subject to taxation, which includes SHORT TERM AND LONG TERM TAX ON CAPITAL GAINS as well as DIVIDEND PAY-OUTS."

5.4 The three accounts you must have

Account	With whom	For what
Savings Account	A commercial bank	Money
Trading Account	A SEBI registered stock broker of a recognized stock exchange	To buy or sell securities on the stock exchange
Demat Account	A SEBI recognized Depository Participant (DP) of a Depository	Holding securities in dematerialized / electronic form

Note the layering: a depository holds the securities; a depository participant is your point of contact with it. You open your account with the DP, not with NSDL or CDSL directly.

5.5 KYC for the securities market

Compare with Chapter 4: bank KYC was described as a bank's own risk-management process. Securities market KYC is mandatory under a statute — the Prevention of Money Laundering Act, 2002. That statutory basis is examinable.

5.6 The primary market

Read SEBI's role carefully. SEBI examines the prospectus to see that it meets the requirements of the SEBI Regulations. SEBI does not approve the company, does not endorse the share, and does not promise the issue will do well. Confusing "SEBI examined the prospectus" with "SEBI recommends this IPO" is a serious and common error — and it is the seed of a great deal of mis-selling.

ASBA — Application Supported by Blocked Amount

Key point

"An investor can now apply for shares in the primary market through ASBA. In public issues w.e.f. MAY 01, 2010 ALL THE INVESTORS can apply through ASBA. ASBA is an application by an investor containing an AUTHORIZATION TO THE BANK TO BLOCK THE APPLICATION MONEY IN HIS/HER BANK ACCOUNT, for subscribing to an issue. BLOCKED AMOUNT CONTINUES TO EARN INTEREST. If an investor is applying through ASBA, his application money shall be DEBITED FROM THE BANK ACCOUNT ONLY IF HIS/HER APPLICATION IS SELECTED FOR ALLOTMENT, after the basis of allotment is finalized. The investor NEED NOT HAVE TO BOTHER ABOUT REFUNDS as money to the extent required for allotment of securities, is deducted from the bank account and in case the securities are not allotted, then the blocked amount is RELEASED AND MADE AVAILABLE TO USE."

Three benefits, each examinable:

The money stays in your account and keeps earning interest while blocked.
It is debited only if you get an allotment.
No refund process is needed — non-allotted money is simply released.

Before ASBA, an applicant wrote a cheque for the full amount, lost the use of the money for weeks, and then waited for a refund. ASBA removed all three problems at once.

UPI in ASBA

5.7 The secondary market

Placing an order

Four modes:

Online trading account by visiting the broker's website
Mobile trading app of the broker
Call & Trade facility on the phone
Physically visiting their office

And the chapter's boxed Word of Caution:

5.8 Trading days and the settlement cycle

On a purchase: you pay into the broker's bank account before the pay-in day; the broker credits the shares to your demat account after the pay-out day.

On a sale: you deliver shares to the broker's demat account before the pay-in day; the broker credits funds to your bank account after the pay-out day.

A note on the real world, kept separate from the exam. This booklet was published in November 2020, when T+2 was the Indian standard. Indian exchanges have since shortened the cycle — moving in phases to T+1, completed across all listed scrips in January 2023, with an optional same-day T+0 settlement introduced for a set of scrips from 2024. India was the first major market to make that move at scale. For this examination, answer T+2 as the booklet states it, but know the direction of travel: the principle — trade day plus a settlement period, with pay-in before pay-out — is unchanged.

5.9 Margin and pledging

Margin may be provided as cash or as fixed deposits, bank guarantee, securities, units of mutual funds, government securities and treasury bills in demat form.

The key protection here: your shares stay in your own demat account with a pledge marked on them. They do not move into the broker's account. That single rule exists because of past cases in which brokers misused client securities.

5.10 Contract note

The chapter's do's list adds the timing: "Insist on a valid contract note/confirmation memo for trades done WITHIN 24 HOURS of the transaction."

5.11 Basic Services Demat Account (BSDA)

Benefits:

Nil/Low Annual Maintenance Charges (AMC)
Free of charge periodic transaction and holding statements
2 physical statements free of charge during the billing cycle
At least 2 Delivery Instruction Slips (DIS) issued at the time of account opening

The AMC slabs as stated in the booklet:

Value of debt holdings	Value of equity holdings	Annual Maintenance Charges
Up to ₹1,00,000	Up to ₹50,000	NIL
₹1,00,001 to ₹2,00,000	₹50,001 to ₹2,00,000	Maximum AMC ₹100
More than ₹2,00,000	More than ₹2,00,000	Charges as applicable to regular demat accounts

Do not confuse this BSDA with Chapter 4's BSBDA — one is a demat account with a depository participant, the other a bank savings account. The similar initials are a deliberate trap in exam papers.

Think of it like this

Systematic risk is the monsoon; unsystematic risk is your own roof

When the monsoon fails, every farmer in the district suffers. It does not matter how many different fields you own or how widely you spread them — the rain fell on none of them. That is systematic risk, also called market risk: losses "due to factors affecting the OVERALL PERFORMANCE of financial markets and macroeconomic factors", with "stock market bubbles and crashes" as the booklet's examples.

When your roof collapses, only your house is wet. The neighbour is fine. That is unsystematic risk: "the uncertainty inherent in A PARTICULAR COMPANY OR INDUSTRY" — the booklet lists a new competitor, a regulatory change driving down sales, a shift in management, a product recall.

The practical consequence is the whole reason diversification exists. Owning twenty houses protects you completely against one roof collapsing, and not at all against the monsoon.

So diversification is powerful and bounded at the same time — exactly what Chapter 3 said in one sentence: "although diversification does not provide guarantee against loss, it is the most important component for reaching long-term financial goals while minimizing risk."

Volatility is a healthy man's fever chart; business risk is the shutter coming down

The booklet is careful to separate two things that look alike on a screen.

Volatility risk is the risk that "the stock prices of a company may fluctuate, EVEN WHEN THOSE COMPANIES AREN'T IN DANGER OF FAILING." The phrase even when is the whole definition. A perfectly sound company's share can fall 30% in a bad quarter because of sentiment, a sector rotation, or an index rebalancing — and recover.

Business risk is "the risk that a business might STOP ITS OPERATIONS due to any unfavourable market or financial situation." The shutter comes down. There is no recovery to wait for.

The two need opposite responses. Volatility is handled by time and by spreading purchases — the booklet prescribes "investing through Systematic Investment Plan of Mutual Funds or buying equities directly from the market in SMALLER LOTS over a period of time." Business risk is handled by not owning too much of any one company, and by "a good understanding of the fundamentals."

An investor who panics at volatility sells a healthy company cheap. An investor who ignores business risk holds a dying one all the way down.

Three accounts, three jobs — and a demat account alone buys nothing

People say "open a demat account" the way they say "get a SIM card", as though it were the only step. The chapter lists three:

Account	With whom	What it holds or does
Savings account	A commercial bank	The money
Trading account	A SEBI registered stock broker of a recognized exchange	Places the buy and sell orders
Demat account	A SEBI recognized Depository Participant of a Depository	Holds the shares, in electronic form

Think of buying vegetables. The savings account is your purse. The trading account is the shop that transacts for you. The demat account is the bag you carry them home in. A bag alone buys nothing; a purse alone reaches no shop.

One more layer worth getting right. NSDL and CDSL are the two SEBI registered depositories in India — they are the warehouse. Your DP is the counter you actually deal with. You open the account with the DP, never with NSDL or CDSL directly.

ASBA: your money stays in your account, and keeps earning

Before 2010, applying for an IPO meant writing a cheque for the full amount. The money left your account, sat somewhere for two or three weeks earning you nothing, and then — if you got no allotment — came back as a refund you had to chase.

ASBA ends all three problems with one mechanism: "an authorization to the bank to BLOCK the application money IN HIS/HER BANK ACCOUNT."

	Before ASBA	With ASBA
Where the money sits	Gone from your account	In your account, blocked
Interest	None to you	"Blocked amount CONTINUES TO EARN INTEREST"
If not allotted	Wait for a refund	Blocked amount is simply "released and made available to use"
If allotted	Already paid	"Debited from the bank account ONLY IF... selected for allotment"

And since 1 May 2010, all investors apply this way.

The newer refinement adds UPI to the same idea — "create a UPI ID and PIN", use it for "blocking of funds and making payments" — and the stated gain is that it "reduces the listing time for public issues."

"SEBI examined the prospectus" is not "SEBI recommends this share"

Read the chapter's sentence with a lawyer's eye:

Every word is about the document, not the business. SEBI checks that the disclosures required by its regulations are present. It does not certify that the company is sound, that the price is fair, or that the share will rise.

The commonest mis-selling line in India — "SEBI has approved this IPO, so it is safe" — depends entirely on collapsing that distinction. Newspapers help by writing "SEBI clears IPO" in a headline.

What actually protects the investor is what the chapter asks of you: "Investment in securities market should be done after carrying out RESEARCH ON THE BACKGROUND OF THE COMPANY, FUTURE PROSPECTS AND FINANCIAL STRENGTH of the company."

The merchant banker prepares the prospectus, finalises the allotment process and gets the shares listed — on the company's behalf. Nobody in the chain is working on yours except you.

Pay-in, pay-out, T+2 — why the shares are not there the same evening

A new investor buys on Monday and checks the demat account at 8 p.m., expecting shares. Nothing. Something has gone wrong, surely.

Nothing has gone wrong. Settlement runs on a cycle:

T is the trade day — Monday.
Pay-in day is when the broker pays funds or delivers securities to the stock exchange.
Pay-out day is when the stock exchange pays funds or delivers securities to the broker.
The booklet's cycle is T+2 rolling settlement, w.e.f. 1 April 2003 — so a Monday trade settles on Wednesday.
Then: "the pay-out of funds and securities to the clients is done by the broker WITHIN 24 HOURS of the pay-out."

Note the direction of the two definitions: pay-in is broker → exchange; pay-out is exchange → broker. Candidates reverse them constantly.

A real-world footnote, kept out of the exam answer. This booklet is from November 2020. Indian exchanges have since shortened the cycle in phases to T+1, completed for all listed scrips in January 2023, with an optional T+0 for a set of scrips from 2024 — India moving ahead of most major markets. Answer T+2 as the booklet states it. The structure — trade day, pay-in, pay-out — is what actually matters and has not changed.

Margin pledge: the shares never leave your own demat account

Buying on margin means "to pay only a certain percentage of the price of the stock and BORROW MONEY FROM THE BROKER to finance the rest" — the percentage you pay being the margin. Paying the whole price upfront instead is called early pay in.

You can give that margin as cash, or as fixed deposits, bank guarantee, securities, mutual fund units, government securities and treasury bills in demat form.

And then the rule that matters more than any other in this section:

Picture handing a shopkeeper the keys to your house as security versus letting him put a lien on the house while you keep living in it. A pledge is the second: "a deposit of some personal property as collateral for a debt." Your shares stay in your name, in your account, with a mark on them.

So if a broker ever asks you to transfer shares into his account as collateral, that is not margin — it is the precise thing SEBI stopped permitting, after cases in which brokers misused client securities. You create the pledge yourself, by instruction: "SPEED-e" for NSDL, "Easiest" for CDSL.

BSDA is not BSBDA — one holds shares, the other holds money

Two acronyms, four letters apart, and examiners love the gap.

	BSBDA (Chapter 4)	BSDA (Chapter 5)
What it is	A bank savings account	A demat account
With whom	A bank	A Depository Participant
Holds	Money	Securities
Purpose	Financial inclusion — zero balance banking	Wider financial inclusion — reduce the cost of holding securities for retail individual investors
Signature benefit	Zero balance, free ATM card and passbook	Nil or low Annual Maintenance Charges

The BSDA's charge structure is worth learning as a shape, since it is the one table in the chapter with numbers:

Debt holdings	Equity holdings	AMC
Up to ₹1,00,000	Up to ₹50,000	NIL
₹1,00,001–₹2,00,000	₹50,001–₹2,00,000	Maximum ₹100
Above ₹2,00,000	Above ₹2,00,000	As for a regular demat account

Note the asymmetry that candidates miss: the equity thresholds and the debt thresholds are different at the first slab — ₹50,000 for equity, ₹1,00,000 for debt.

Key terms in this chapter

Annual Maintenance Charges (AMC): Charges collected by Depository Participants towards maintenance of demat accounts of beneficiary owners, depending on the value of holdings in the account.
ASBA — Application Supported by Blocked Amount: An application containing an authorisation to the bank to block the application money in the investor's own bank account. The blocked amount continues to earn interest and is debited only if the application is selected for allotment, so no refund process is needed. All investors apply this way with effect from 1 May 2010.
Basic Services Demat Account (BSDA): A demat account made available by SEBI to reduce the cost of holding securities for retail individual investors: nil or low annual maintenance charges, free periodic statements, two free physical statements per billing cycle and at least two Delivery Instruction Slips at account opening.
Business risk: The risk that a business might stop its operations because of an unfavourable market or financial situation.
Commodities: Goods with economic value — earth's natural products which are produced and traded, usually raw materials for further processing. Broad types are agricultural, non-agricultural (metals, energy, polymers) and others.
Commodity price risk: The price uncertainty that adversely affects both users and producers of commodities. Producers are at risk of prices moving lower; consumers are at risk of prices moving higher.
Contract note: Evidence of a trade done by the stock broker, and a legal document, containing the securities bought or sold, the traded price, the time of trade and the brokerage. Investors should insist on one within 24 hours of the transaction.
Currency risk: The possibility of losing money because of unfavourable movements in exchange rates. Investors holding assets across national borders are exposed to it.
Dabba trading: Illegal informal trading using cash that takes place directly among traders who bet on stock price fluctuations. It offers none of the safety or settlement guarantee of trades done on a stock exchange.
Demat account: An account with a SEBI recognized Depository Participant of a Depository, for holding securities in dematerialised or electronic form.
Depository: An institution holding securities in electronic form. NSDL and CDSL are the two SEBI registered depositories in India.
Depository Participant (DP): The intermediary through which an investor opens and operates a demat account with a depository.
Early pay in: Paying the entire price of a stock upfront, rather than paying a margin and borrowing the rest.
Economy of scale (mutual funds): The feature by which a mutual fund buys and sells large amounts of securities at one go, giving it lower transaction costs than an individual would pay.
Forward contract: An agreement between two parties to sell or buy a commodity at a fixed price in the future. Forwards are traded over the counter and can be privately negotiated.
Futures contract: A contract traded on a commodity derivatives exchange with a standardized way of execution, guaranteed by the clearing house of a recognized exchange, which minimises the risk of default. The buyer holds a long position and the seller a short position.
Hedging: The process of protecting against financial loss or price risk. A hedge guarantees a consumer the supply of a commodity at a set price and a producer a known price for output.
Hot tips: Unsolicited stock recommendations, often spread by a person wanting to offload securities that may not be marketable. Disseminating hot tips is an illegal activity which should be reported to SEBI.
Inflation risk: Also called purchasing power risk: the chance that the cash flows from an investment will not be worth as much in future as today because of a decline in purchasing power.
KYC in the securities market: The Know Your Client process with a DP or stock broker, mandatory under the Prevention of Money Laundering Act, 2002, requiring Officially Valid Documents as proof of identity and address. It may be completed online through Aadhaar based e-KYC or offline.
Liquidity risk: The risk that an investment cannot be bought, sold or converted into cash quickly enough to prevent or minimise a loss or meet an immediate expense. The booklet says it can be minimised to a great extent by diversifying.
Margin: The percentage of the price of a stock paid upfront when the remainder is financed by borrowing from the broker. It may be provided as cash or as fixed deposits, bank guarantee, securities, mutual fund units, government securities and treasury bills in demat form.
Margin pledge: The only permitted way for a stock broker to accept securities as collateral: a pledge created on securities held in the client's own demat account, on the client's instruction — through SPEED-e for NSDL or Easiest for CDSL. The securities are never transferred to the broker.
Market risk (Systematic risk): Losses arising from factors affecting the overall performance of financial markets and macroeconomic factors. Stock market bubbles and crashes are the booklet's examples. It cannot be diversified away.
MCX and NCDEX: The major Indian commodity derivative exchanges. MCX trades predominantly non-agricultural products such as gold, silver, base metals, crude oil and natural gas; NCDEX trades predominantly agricultural products such as pulses, cereals and sugar.
Merchant banker: An intermediary hired by a company issuing securities, which on behalf of the company prepares the prospectus and ensures related compliance including finalisation of allotment and listing of shares.
Mutual fund: A vehicle that pools money from many investors and invests it in stocks, bonds, short-term money-market instruments, other securities or assets, or a combination. All mutual funds must be registered with SEBI before launching any scheme.
Options contract: A financial instrument giving the buyer the right but not the obligation to exercise at a predetermined date and price, in exchange for a premium. A call option gives the right to buy the underlying; a put option gives the right to sell it.
Pay-in day: The day when the broker makes payment of funds (on a purchase) or delivery of securities (on a sale) to the stock exchange.
Pay-out day: The day when the stock exchange makes payment of funds (on a sale) or delivery of securities (on a purchase) to the broker. Brokers must pass on the pay-out to clients within 24 hours.
Pledge: A deposit of some personal property as collateral for a debt.
Power of Attorney (investor caution): An authority given to another to act on your behalf. Investors should not issue a general Power of Attorney in favour of a stock broker or DP, and should exercise due diligence by issuing a very specific one if any is needed.
Price discovery: A benefit of a commodity derivative exchange: helping producers, consumers, exporters and importers discover the price for a future date so they can take informed decisions.
Primary market: The market in which a company publicly issues new stocks and bonds for the first time, often as an initial public offer, and investors are allotted securities directly by the company.
Prospectus: The document issued to the public for subscription of shares. SEBI examines it to see that it meets the requirements of the SEBI Regulations — which is not an approval of the company or a guarantee of returns.
Risk-o-meter: The depiction required by SEBI guidelines showing the level of risk of a mutual fund scheme, with six levels: Low, Low to Moderate, Moderate, Moderately High, High and Very High.
Secondary market: The market where securities are traded after issue, with investors buying from existing investors through stock brokers. Major SEBI recognized exchanges are BSE Ltd. and NSE.
Solution Oriented Schemes: Mutual fund schemes which make their investments as per the goals of individuals, such as retirement and child education planning. One of the five broad categories.
Systematic Investment Plan (SIP): A facility to invest a fixed amount regularly — weekly, monthly or quarterly — in a mutual fund scheme, from as little as ₹500, through post-dated cheques, standing instruction or ECS. It inculcates the habit of saving and benefits from rupee cost averaging instead of market timing.
Systematic Transfer Plan (STP): A facility to transfer funds from one scheme to another at regular intervals.
Systematic Withdrawal Plan (SWP): A facility to withdraw fixed amounts from a particular scheme at regular intervals.
T+2 rolling settlement: The settlement cycle stated in the booklet, in force from 1 April 2003, where T is the trade day — so a Monday trade settles on the following Wednesday. Indian exchanges have since shortened this to T+1, with optional T+0 for some scrips.
Trading account: An account with a SEBI registered stock broker of a recognized stock exchange, used to buy or sell securities on the exchange.
Unsystematic risk: The uncertainty inherent in a particular company or industry — a new competitor, a regulatory change driving down sales, a shift in management, a product recall. This is the risk diversification removes.
UPI in ASBA: The facility to use a UPI ID and PIN for blocking funds and making payments in the public issue process, which brings ease of use and reduces the listing time for public issues.
Volatility risk: The risk that a company's stock price fluctuates even when the company is not in danger of failing. It is managed by investing through SIPs or buying in smaller lots over time.
Warehouse receipt: A receipt issued by a commodity exchange for produce deposited in its warehouse after assaying by exchange recognized assayers. Loans can be obtained from banks against these receipts, so a farmer need not sell at harvest.

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Original explanatory writing based on the official NISM workbook for Series SEBI-ICE, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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