CBSE Class 12 Business Studies Financial Markets Assignment

Introduction :
Financial Market is a market for creation and exchange of financial assets like share, bonds etc. It helps in mobilising savings and channelising them into the
most productive uses. It helps to link the savers and the investors by mobilizing funds between them. The person / Institution by which allocation of funds is done is called financial intermediaries.

Functions of Financial Market.
1. Mobilisation of Savings and channeling them into the most productive uses: Financial market facilitates the transfer of savings from savers to investors and thus helps to channelise surplus funds into the mostproductive use.

2. Help in Price Determination : Financial Market helps in interaction of savers and investors which in turn helps in the determination of prices of the financial assets such as shares, debentures etc.

3. Provide Liquidity to Financial Assets : Financial market ficilitate easy purchase and sale of financial assets. Thus, it provide liquidity to them so that they can be easily converted into cash whenever required.

4. Reduce cost of transact ions : Financial market provide valuable information about securities which helps in saving time, efforts and money and thus it reduces cost of transactions.

Money Market :-

It is a market for short term funds / securities whose period of maturity is upto one year. The major participants in the money market are RBI, Commercial Banks, Non-Banking Finance Companies, State Government, Large Corporate Houses and Mutual Funds. The main instruments of money market
are as follows.

1. Treasury Bills : They are issued by the RBI on behalf of the Central Government to meet its short-term requirement of funds. They are issued at a price which is lower than their face value and repaid at par. They are available for a minimum amount of Rs. 25,000 and in multiples thereof.
They are also known as Zero Coupon Bonds.

2. Commercial Paper : It is a short term unsecured promisory note issued by large and credit worthy companies to raise short term funds at lower rates of interest than market rates. They are negotiable instrument transferable by endorsement and delivery with a fixed maturity period of 15 days to one year.

3. Call Money : It is short term finance repayable on demand, with a maturity period of one day to 15 days, used for interbank trasactions. Call Money is a method by which banks borrow from each other to be able to maintain the cash reserve ratio as per RBI. The interest rate paid on call money loans is known as the call rate.

4. Certificate of Deposit : It is an unsecured instrument issued in bearer form by Commercial Banks & Financial institutions. They can be issued to individuals, Corporations and companies for raising money for a short period ranging from 91 days to one year.

5. Commercial Bill : It is a bill of exchange used to finance the working capital requirements of business firms. A seller of the goods draws the bill on the buyer when goods are sold on credit. When the bill is accepted by the buyers it becomes a marketable instrument and is called a trade bill.
These bills can be discounted with a bank if the seller needs funds before the bill maturity.

Capital Market :
It is a market for long term funds where debt and equity are traded. It consists of development banks, commercial banks and stock exchanges. The capital market can be divided into two part.
1. Primary Market.
2. Secondary Market

Primary Market :
It deals wth the new securities which are issued for the first time. It is also known as the new issues market. The investors in this market are banks, financial institutions, insurance companies, mutual funds and individuals. It has no fixed geographical location and only buying of securities take place in the primary market.

Secondary Market :
It is also known as the stock market or stock exchange where purchase and sale of existing securities take place. They are located at specified places and both
the buying as well as selling of securities take place.

Methods of flotation of New Issues in the Primary Market

1. Offer through Prospectus : It involves inviting subscription from the public through issue of prospectus. A prospectus makes a direct appeal to investors to raise capital through an advertisement in newspapers and magazines.

2. Offer for sale : Under this method securities are offered for sale through intermediaries like issuing houses or stock brokers. The company sells securities to intermediary / broker at an agreed price and the broker resell them to investors at a higher price.

3. Private Placements : It refers to the process in which securities are allotted to institutional investor and some selected individuals.

4. Rights Issue : It refers to the issue in which new shares are offered to the existing shareholders in proportion to the number of shares they already possess.
5. e-IPOs :- It is a method of issuing securities through on-line system of stock exchange. A company proposing to issue capital to the public through the on-line system of the stock exchange has to enter into an agreement with the stock exchange. This is called an e-initial public offer.
SEBI registered brokers have to be appointed for the purpose of accepting applications and placing orders with the company.

Difference between Capital and Money Market. 

Difference between Primary and Secondary Market 

Stock Exchange / Share Markets
A stock Exchange is an institution which provides a platform for buying and selling of existing securities. It facilitates the exchange of a security i.e. share, debenture etc. into money and vice versa. Following are some of the important functions of a stock Exchange.

1. Providing liquidity and Marketability to Existing Securities : Stock Exchange provide a ready and continuous market for the sale and purchase of securities.

2. Pricing of Securities : Stock Exchange helps in constant valuation of securities which provide instant information to both buyers and sellers and thus helps in pricing of securities which is based on the forces of demand & supply.

3. Safety of transaction : The members of a stock exchange are well regulated, who are required to work within the legal framework. This ensures safety of transactions.

4. Contributes to Economic Growth : Stock exchange provide a platform by which saving get channelised into the most productive investment proposals, which leads to capital formation & economic growth.

5. Spreading of Equity cult : Stock exchange helps in educating public about investments in securities which leads to spreading of Equity culture.

6. Providing scope for speculation : Stock exchange provides scope within the provisions of law for speculation in a restricted and controlled manner.

Trading Procedure on a Stock Exchanges.

1. Selection of Broker : In order to trade on a stock Exchange first a broker is selected who should be a member of stock exchange as they can only trade on the stock exchange.

2. Placing the order : After selecting a broker, the investors specify the type and number of securities they want to buy or sell.

3. Executing the order : The broker will buy or sell the securities as per the instructions of the investor.

4. Settlement : Transactions on a stock exchange may be carried out on either cash basis or a carry over basis (i.e. badla). The time period for which the transactions are carried forward is referred to as accounts which vary from a fortnight to a month. All transactions made during one account are to be settled by payment for purchases and by delivery of share certificates, which is a proof of ownership of securities by an individual.
Earlier trading on a stock exchange took place through a public outcry or aution system which is non replaced by an online screen based electronic trading system. Moreover, to eliminate, the problems of theft, forgery, transfer delays etc an electronic book entry from a holding and transferring securities has been introduced, which is called process of dematerialisation of securities.

National Stock Exchange of India (NSE)

NSE was set up by leading financial institutions, banks, insurance companies and other financial intermediaries in 1992 and was recognised as a stock exchange in April 1993. It has provided a nation wide screen based automated trading system with a high degree of transparency and equal access to investors irrespective of geographical location. NSE was set up with the following objectives.
1. Establishing a nation-wide trading facility for all types of securities.
2. Ensuring equal access to investors all over the country through an appropriate communication network.
3. Enabling shorter settlement cycles and book entry settlements.
4. Providing a fair, efficient and transparent securities market using electronic trading system.
5. Meeting international bench marks & standards.

NSE provides trading in following two segments :
1. Whole sale Debt Market Segment which provide platform for a wide range of fixed income securities such as Government Securities, treasury bills, state development loans, PSU bonds etc.
2. Capital Market Segment which provide platform for equity shares, preference shares, debentures etc. as well as retail Govt. securities.

Over the Counter Exchange of India (OTCEI)
OTCEI was promoted by UTI, ICICI, IDBI, IFCI, LIC, GIC, SBI Capital
Markets and can Bank Financial Services. It is a place where buyers seek sellers and vice-versa and then attempt to arrange terms and conditions for purchase / sale acceptable to both the parties. It is fully computerised, transparent, single window exchange which provide quicker liquidity to securities at a fixed and fair price, liquidity for less traded securities. Following are the advantages of OTC Market.
1. It provides a trading platform to smaller and less liquid companies.
2. It is a transparent system of trading with no problem of bad or short deliveries.
3. Family concerns & closely held companies can go public through OTC.
4. Dealer can operate both in new issues & secondary market at their options.
5. It is cost effective as there is a lower cost of new issues and lower expenses of servicing the investors.

Difference between NSEI and OTCEI

Depository Services and D mat Accounts :
Keeping in the mind the difficulties to transfer of shares in physical form SEBI has developed a new system in which trading in shares is made compulsory in electronic form Depository services and D Mat Account are very basis of this system.

Depository Services :
Now a days on line paper-less trading in shares of the company is compulsory in India. Depository services is the name of that mechanism. In this system transfer of ownership in shares take place by means of book entry without the physical delivery of shares. When a investor wants to deal in shares of any company he has to open a D Mat account. There are four players who participate in this system.
1. The Depository : A depository is an institution which hold the shares of an investor in electronic form. There are two depository institution in India these are NSDL and CDSL.
2. The Depository Participant : He opens the Account of Investor and maintains securities records.
3. The Investor : He is a person who wants to deal in shares whose name in recorded.
4. The Issuing Company : That organisation which issue the securities. This issuing company send a list of the shareholders to the depositories.

D Mat Accounts :
In this process a shares certificates converted its physical form to electronic form and credited the same number of holding to D mat A/c.

Benefits of D Mat Account :
1. Reduces of paper work.
2. Elimination of problems on transfer of shares such as loss, theft and delay.
3. Exemption of stamp duty when transfer of shares.
4. The concept of odd lot stand abolished.
5. Increase liquidity through speedy settlement.
6. Attract foreign investors and promoting foreign investment

Depository System Parallel to Banking System
The depository system in parallel to the Banking System. A bank holds cash in account the depository hold shares in account. The transfer of cash and shares take place with-out the physical handling of cash or shares.

Securities and Exchange Board of India (SEBI)
SEBI was established by Government of India on 12 April 1988 as an interim administrative body to promote orderly and healthy growth of securities market and for investor protection. It was given a statutory status on 30 January 1992 through an ordinance, which was later replaced by an Act of Parliament known as the SEBI Act, 1992.

Objectives of SEBI
1. To regulate stock exchange and the securities market to promote their orderly functioning.
2. To protect the rights and interests of investors and to guide & educate them.
3. To prevent trade malpractices such as internal trading.
4. To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers etc. 

Important Questions for NCERT Class 12 Business Studies Financial Markets

Question. Instruments with a maturity period of le than one year are traded in-
a.Money market
b. NSEI
C. Stock exchange
d. Capital market
Ans. A

Question. ______________is not a participant in many market.
a. Mutual funds
b. RBI
c. NBFCs
d.SEBI
Answer  : D

Question. Financial market ________ financial assets.
(a) Creates
(b) Exchange
(c) Creates and Exchange
(d) None of the above

Answer  :  C

Question. ________ is a part of money market.
(a) Commercial Bill
(b) Equity share
(c) Preference share
(d) Debentures

Answer  :  A

Question. Money market deals in ________ securities.
(a) Short-term
(b) Long-term
(c) Short-term and long-term
(d) Mid-term

Answer  :  A

Question. The term of the Treasury Bill cannot be more than ________ year.
(a) One
(b) Two
(c) Five
(d) Ten

Answer  :  A

Question. Call money or call loans are ________ .
(a) Fixed
(b) Liquid
(c) Costly
(d) Cheap

Answer  :  B

True or False

1. Is the statement true that the price in the primary market is determined by the forces of demand and supply? False
2. Call money is the short term money market instrument issued for a period of 15 days to 1 year. False
3. Treasury Bills are available in 25,000 and its multiples. True
4. The instruments sold in the capital market are treasury bill, certificate of deposits, call money etc. False
5. A prospectus is a direct appeal to investors to raise capital through an advertisement in newspapers, magazines etc.True
6. Primary market promotes indirect capital formation. False
7. The original purpose of commercial papers is to meet fixed capital needs. False
8. The participants in the capital market are foreign investors, RBI and Bank. False
9. The capital market is generally much safer with a minimum risk of default. False
10. The money maket is classified into primary and secondary market. False
11. Certificate of deposits are unsecured instrument which are not issued in bearer form. False
12. Commercial bills are common instrument used in credit purchase and sale. True
13. Secondary market helps existing investors to invest and fresh investors to enter the market. True
14. Only buying of securities take place in the primary market, securities cannot be sold there.True
15. Secondary market directly promotes capital formation. False

FILL IN THE BLANKS

1. The function of SEBI which ensures that the investors gets a safe and fair deal on the secondary Market is safety of transaction.
2. The process of holding securities in any electronic form is called dematerialization.
3. The two main depository participants in India are NSDL and CDSL.
4. National stock Exchange in India was Incorporated in the year 1992.
5. NSE in India started operation in the year 1994.
6. Meeting flotation cost, commercial paper is used as one instrument of money market.
7. Private placement is the allotment of securities by a company to institutional investor and some selected individuals.
8. In secondary market the dealing of securities is between investors.
9. The capital market deals in medium and long term securities.
10. Capital market is a place through which long term funds both debt and equity are raised and invested.
11. The head office of SEBI is situated in MUMBAI .
12. SEBI has 3 regional office(s) .
13. It has been made compulsory to settle all trades with in 2 days of the trade date.
14. Asia’s first Stock Exchange is BSE (Bombay stock exchange ).
15. BSE was established in the year 1875.
16. Registration of broker and sub-brokers is the Regulatory function of SEBI.
17. Training of intermediaries of the security market is the DEVELOPMENT function of SEBI.
18. Prohibition of fraudulent and unfair practices is protective function of SEBI.
19. NSE deals in whole sale market Segment and capital Market segment .
20. NSE In India was recognized as a stock exchange in the year 1993.

Question. What are the components of Capital Market?
Answer: (i) Primary Market and (ii) Secondary Market.

Question.. State any four methods of floating new issue in the Primary Market?
Answer: Following are the methods of raising capital in the primary market:
(i)Public Issue: Under this method, the company issues a prospectus and invites the general public to purchase shares or debentures.
(ii) Offer for Sale: Under this method, firstly the new securities are offered to an intermediary (generally forms of stock brokers) at a fixed price. They further resell the same to the general
public at a higher price. The advantage of doing this is that the issuing company feels free from the tedious work of making a public issue.
(iii) Private Placement: It refers to the allotment of securities by a company to Institutional Investors and some selected Individuals. This method is preferred as it is a cheaper method raising funds as compare to a public issue. Some companies, therefore, cannot afford a public and choose to use private placement.
(iv) Right Issue: This method is used by those companies who have already issued their shares en an existing company issues new shares, first of all it invites its existing shareholders This issue is called the right issue. The shareholders are offered the right to buy new share in the proportion to the number of existing shares.

Question. Name the Index of Bombay Stock Exchange.
Answer: It is known as SENSEX.

Question.. Outline the functions of SEBI
Answer: The functions of SEBI can be divided into three parts
1. Regulatory Functions: The following are the regulatory functions of the SEBI
(i) То register the brokers, sub-brokers and other players of the stock market .
(ii) To register the collective investment scheme, such as, mutual funds.
(iii) To regulate the working of Stock Brokers, Portfolio Exchanges, Underwriters and Merchant Bankers and the business at Stock Exchanges and any other Securities Market.
2. Developmental Functions: The following are the developmental functions of the SEBI:
(i) To impart training to the intermediaries (intermediaries include Share Brokers Sub brokers, Share Transfer Agents, Issue Registrars, Merchant Bankers, Portfolio Manager etc.)
(ii)To carry on research work and publish different kinds of information for the convenience of all the parties operating in the capital market.
(iii) To develop the capital market by adapting a flexible approach.
3. Protective Functions: Following are the protective functions of SEBI:
(i) Prohibition of Fraudulent and Uncle Trade Practices such as to supply misleading statements to cheat the investors) in connection with security market.
(ii) Controlling insiders trading in securities. [Insider trading means the buying and selling securities by those persons (Directors, Promoters, etc) who have some secret information about the company and who wish to take advantage of this secret information.]
(iii) Undertaking steps for investor protection.

Question. What is meant by Secondary Market?
Answer: It refers to the market which deals in previously issued securities.

Question. Financial markets facilitate easy purchase and sale of financial assets.which function of financial markets is highlighted here?
Answer: Provide liquidity to financial assets.

Question. How many Depositories are operational in India. Name them.
Answer: NSDL National Securities Depository Ltd and CDSL Central Depository services ltd

Question. What are the instruments of capital market?
Answer: Equity shares or Debentures.

Question. What is ‘demutualization’ of stock exchange?
Answer: It separates the ownership and control of changes from trading rights of members.

Question. Distinguish between the primary market and secondary market on any four basis:
Sale of securities, ii)capital formation, iii)determination of price, iv) location
Answer: 

Question. Define financial markets. Explain any four functions of financial markets
Answer: correct meaning.
Functions”:
i) Mobilisation of saving and channelling them into the most productive uses
ii) Facilitate price discovery
iii) Provide liquidity to financial assets
iv) Reduces the cost of transaction

Question. What is a money market? Explain any three money market instruments.
Answer: Money market is a market for short term funds dealing in monetary assets whose maturity period is up to one year.
Call Money-to maintain CRR banks borrow from each other for 1-15 days.
T-Bills in form of promissory notes maturing in less than 1 year. Issued by RBI.
Minimum denomination 25000. Also known as zero coupon bonds Commercial Bills: trade bills and accommodation bills Commercial Papers: unsecured, negotiable promissory note for 15days to 1 year, issued by large creditworthy companies for bridge financing ie to meet floatation cost of raising long term funds from capital market Certificate of deposits: short term, unsecured, negotiable instruments in bearer form issued by developmental financial institutions and commercial banks, individuals and companies and corporations. These are issued during periods of tight liquidity, when the deposit growth of banks is slow but demand for credit is high, helps mobilise large funds for short term requirements.

Question. Nature of money market can be well explained with the help of its features. State any three such features of money market.
Answer: Features of money market:
1. The money market is a market for short term securities with a maturity period up to one year.
2. It is a market where low risk, unsecured and short term debt instruments are traded.
3. It has no physical location, but is an activity conducted over the telephone and through the internet.

Question. Explain any three functions of financial market.
Answer: Functions of a financial market:
1. Mobilization of saving and canalizing them into most productive use.
2. Facilitating price discovery.
3. Providing liquidity to financial assets.
4. Reducing the cost of transactions.

Question. State any five methods of floating new issues in the primary market.
Answer: The methods of floating new issues in primary market are 

Question. Explain the procedure of trading in the stock Exchange.
Answer: Few years back trading on a stock exchange took place through a system of auction or public outcry. But at present the trading is conducted through a computer at the broker’s office.
Trading in stock exchange involves the following steps:
(i) Selection of brokers: the first step is to select the broker who will buy and sell the securities on behalf of the investor. A broker can be an individual, corporate body or partnership firm.
(ii) Openings demat account: A demand account through which share certificates and money are transferred in case of sale or purchase of securities.
(iii) Placing order: After openings demat account the investor specifies the number and type of securities that he want to purchase or sell.
(iv) Execution of order: According to the instruction of investor the broker buys or sells the securities.
(v) Settlement: the transaction on a stock exchange is carried out either on cash basis or on a carryover basis. The carry over basis is known as ‘badla’.

Question. The directors of a company want to modernize its plant and machinery by making a public issue of shares. They wish to approach the stock exchange, while the finance manager prefers to approach a consultant for the new public issue of shares. Advise the director whether to approach the stock exchange or a consultant for new public issue of shares and why. Also advise them about different methods which the company may adopt for the new public issue of shares.
Answer: The director should approach a consultant for new public issue of shares.
The stock exchange deals with sale and purchase of existing securities only, not in new issue of securities.
Different methods which the company may adopt for the new public issue of shares:
Offer through prospectus.
I. Offer for sale
II. Private placement
III. Rights issue
IV. e-Ipos`