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Table of contents
1.
Easy Level Questions
2.
Medium Level Questions
3.
Hard Level Questions
4.
Conclusion
Last Updated: Mar 27, 2024

Trade Life Cycle Interview Questions

Author Rupal Saluja
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Ashwin Goyal
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18 Jun, 2024 @ 01:30 PM

Have you ever thought about what happens when a trade is initiated, that is, when you put an order to sell or buy some stocks or shares in the stock market? 

Like any other business, this trade also has its life cycle that describes the various stages of making a successful trade.

Representation of Trade

This quick guide on Trade Life Cycle Interview Questions will help a lot if you prepare for an interview regarding the same in the future. This article consists of the 30 most popular Trade Life Cycle Interview Questions, so let’s get started without wasting time.

Trade Life Cycle Interview Questions

Easy Level Questions


1. What is equity? State the two types of orders that are issued.

Ans: Equity is the term used to describe the shareholders’ stake in the company. Equity is a company's total assets minus its total liabilities.
The two types of orders that are issued in equity trading are:

  • Buy Orders
  • Sell Orders


2. Define Equity Funding.

Ans: Equity Funding refers to the insurance policy paid for by a mutual fund. The cost of the mutual fund shares is used to pay the insurance policy premiums.
This enables individual investors to gain and benefit from a traditional mutual fund investment.

3. Do you have an idea of private equity transactions?

Ans: The private equity transactions are investments by private equity firms in particular target companies.
A target company is a such enterprise that has the potential to perform in a short duration of time.

4. Explain the term ‘Over the Counter Market’.

Ans: ‘Over the Counter Market’ is a term used to describe a decentralized market with no physical location. In this market, traders or participants trade with each other using various communication modes, such as telephone, e-mail, and proprietary electronic trading systems.

5. What charges are payable while purchasing a stock?

Ans: The charges payable while purchasing a stock are listed below.

  • Stock Brokers
  • Commission
  • Stamp duty
  • Cost of the stock


6. State the different types of Equity Market.

Ans: The different types of Equity Market that exist are listed below.

  • Public Issue
  • Right Issue
  • Private Placements
  • Preferential Allotment


7. Describe EuroDollar.

Ans: EuroDollar is the term used to refer to US dollar deposits at foreign banks or foreign branches of American banks. The orders are regular but outside the US banking system.
 

8. Briefly describe Option Trading.

Ans: In Option Trading, a contract is signed between the seller and buyer. An individual can transact one or more assets at a fixed price before the contract's expiry date. This fixed price was decided while the contract was being made.

9. Do you understand the terms ‘Dovish’ and ‘Hawkish’?

Ans: 

🔥 Dovish
Dovish is an inflation attribute of an investor who favors lower interest rates.

🔥 Hawkish
Hawkish is an inflation attribute of an investor who favors higher interest rates.


10. What do you understand by MF?

Ans: MF stands for Minimum Fill Order. It is a type of attribute attached to an order. It determines the number of shares that has to be available for an order to be triggered.

Medium Level Questions


11. What is the Debt or Equity Ratio?

Ans: The Debt or Equity Ratio is used to calculate the debt against equity. This determines the portions of the company’s finance to be used for the company’s various purposes. It is used as a standard identification to judge any company’s financial stability.

12. What are derivatives? What are its various types?

Ans: A specialized contract made to buy or sell the underlying assets for a particular period in the future at a price determined before is known as a derivative. 
Derivatives are of three types.

  • Future or forward contract
  • Options 
  • Swaps


13. Explain the difference between Realised and Unrealised Profit.

Ans: 
🔥 Realised Profit
The profit comes from completed trade, that is, the trade whose transactions have been executed completely.

🔥 Unrealised Profit
The visual profit would have been made or will be made if trades were executed.

14. What does an Equity Analyst do?

Ans: The work done by Equity Analysts includes researching and analyzing financial data and trends for a company or firm. They write reports on company finances and assign financial ratings. They also help the company to overcome financial crises by suggesting ways to get out of debt.

15. Briefly describe preference shares.

Ans: A preference is a share that enables an individual to claim a stake in the company with one condition. The condition is such that whenever the company liquefies or decides to pay a dividend, the preference shares holder will be among the first set of shareholders to get paid after the company has cleared its debt.

16. Do you have any idea about ROE?

Ans: ROE stands for Return Of Equity. It is a profit measure that calculates the profit a company generates with each shareholder’s equity.
The formula to calculate ROE is mentioned below.

ROE = Net Income/ Shareholder Equity

17. Explain the Hedge Ratio.

Ans: The Hedge Ratio must be known to an individual when he is trying to hedge a position in the market.
Hedge Ratio = volatility in position/volatility of hedging instrument
There are two other factors on which the Hedge Ratio depends. These conversion factors can be used for deliverable bonds and modified duration.

18. What can lead to assets turning into private equity?

Ans: The reasons which can lead to assets turning into private equity are stated below.

  • Raising Capital
  • Increasing Regulation of Public Markets
  • Effect of Public Markets
  • Financing the Private Equity firms


19. What role does earning potential play while judging a stock?

Ans: Earning Potential of a stock is used to judge the stock price. By looking at the stock price externally, you cannot say that the stock is cheap or expensive. A $100 stock can be cheap if the company’s earnings prospects are high enough, while a $20 stock can be expensive if earning potential is low. The P/E ratio is the correct judge of the valuation of the stock.

20. State a few examples of popular Hedge Fund Strategies.

Ans: A few examples of popular Hedge Fund Strategies are listed below.

  • Long Only
  • Relative Value
  • Convertible Arbitrage
  • Risk Arbitrage
  • Macro - stocks, bonds, currencies, commodities
  • Distressed
  • Event Driven
  • Emerging Markets
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Hard Level Questions


21. Provide a list of the different Asset Classes.

Ans: To look into the list of asset classes, refer to the table below.

Categories Asset Classes
Interest Rates Government Bonds, Interest Rate Futures / Swaps / Options, Forward Rate Agreements
Credit Corporate Bonds, Total Return Swaps, Credit Default Swaps, Loans, Asset Swaps
Equities Stocks, Stock Indices, Convertible Bond
Foreign Exchange FX Forwards, Cross Currency Swap, FX Future, FX Swap
Commodities Base Metals, Precious Metals


22. Mention various characteristics of Option Trading.

Ans: To look into the characteristics of Options Trading, refer to the following list.

  • Options are a kind of derivatives. This means the value of the underlying investment determines its value.
  • Option Trading is done among institutional investors, professional traders, individual investors, and securities marketplaces.
  • It is a less risky option because buyers are exposed to known risks.
  • Options have an expiry date, while regular equities stay for an indefinite period.
  • No provisions for physical certificates.
  • Owning an option does not mean owning any shares or dividends.


23. Mention some derivatives that are traded on an Exchange.

Ans: Some derivatives that are traded on an Exchange are listed below.

  • Standardized contracts
  • Currency Options
  • Single Stock Futures
  • Equity Index Futures
  • Exchange Traded Funds
  • Interest Rate Futures (STIR futures and government bond futures)
  • Equity Index Options
  • Interest Rate Options (options on interest rate futures)


24. State some derivatives that are traded Over The Counter.

Ans: Several derivatives that are traded Over the Counter are mentioned below.

  • Interest Rate Forwards
  • Bespoke contracts
  • Interest Rate Swaps
  • FX Swaps
  • Cross Currency Swaps
  • Credit Default Swaps
  • Total Return Swaps
  • Interest Rate Options


25. State certain measures to be taken before making the first purchase.

Ans: The certain measures that one should take before making the first purchase are:

  • Spend time researching and learning about trading, even when a broker handles your account.
  • Requires knowledge, discipline, and time.
  • Be ready to take risks.
  • If you are already facing heavy losses, stop for a day or so.
  • Don’t purchase or sell all your stocks at the same time.


26. Describe the Trade Life Cycle in simplest terms.

Ans: We use a combination of letters to describe the trade life cycle in the simplest terms.

REC VEMC CSR

Risk Assessment
Execution (placing the trade)
Capture (skeleton details, minimum information required)
Validation (especially for OTC derivatives)
Enrichment (adding additional essential information)
Matching (counterparties agreeing)
Clearing (counterparty obligations)
Confirmation (or affirmation - both parties?)
Settlement (carried out by custodian)
Reconciliation (with custodians and reporting)

27. Briefly categorize some Mutual Fund Schemes.

Ans: Some most prominent Mutual Fund Schemes are categorized below.
Based on the Maturity period, mutual fund schemes are categorized into open and closed-ended schemes.
Based on Investment objectives, mutual fund schemes are categorized into growth, balanced, and income schemes.
Other schemes include liquid funds, sector funds, and tax-saving fund schemes.

28. State what the following abbreviations stand for.

Ans: 

BPV - Basis Point Value
CUSIP - Committee on Uniform Security Identification Procedures
ESMA - European Securities and Markets Authority
FINRA - Financial INdustry Regulatory Authority
FIXML - Financial Information eXchange Markup Language
ISDA - International Swaps and Derivatives Association
ISIN - International Securities Identification Number
MIFID - Markets in Financial Instruments Directive
RIXML - Research Information eXchange Markup Language
SWIFT - Society for the Worldwide Interbank Financial Telecommunication

29. Give a brief description of the different financial markets.

Ans: Depending on the maturity period, there are four types of financial markets. These are described below.

🔥 Money Market
Money Market is for short-term borrowing and lending of money and credit. Maturities last for less than a year.

🔥 Capital Market
The Capital Market is for the medium and long-term borrowing of stocks, equities, and bonds.

🔥 Cash Market
Cash Market is for immediate settlement purposes.

🔥 Foreign Exchange Market
The Foreign Exchange Market is for trade in all other global currencies.

30. Describe Debenture. Explain its types.

Ans: A Debenture is a kind of debt instrument. Any collateral or physical assets do not secure it. The debt is issued based on the borrower's reputation or general creditworthiness.
There are two types of the debenture.

🔥 Convertible Debenture
As the name suggests, convertible debentures can be transformed into equity shares of the issuer company after a pre-decided time. They have comparatively lower interest rates.

🔥 Non-convertible Debenture
A non-convertible debenture cannot be converted into equivalent equity shares. They carry comparatively higher interest rates.

Conclusion

We hope you have gained insights on Trade Life Cycle Interview Questions through this article. We hope this will help you excel in your interviews and enhance your knowledge of the Trade Life Cycle. These Trade Life Cycle Interview Questions and answers suit freshers and experienced candidates.

This set of Trade Life Cycle interview questions will not only help you in interviews but also would increase your understanding regarding the same.

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