CBSE Class 12 Business Studies Financial Markets Notes

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Revision Notes for Class 12 Business Studies Chapter 10 Financial Markets

Class 12 Business Studies students should refer to the following concepts and notes for Chapter 10 Financial Markets in Class 12. These exam notes for Class 12 Business Studies will be very useful for upcoming class tests and examinations and help you to score good marks

Chapter 10 Financial Markets Notes Class 12 Business Studies

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. Mobilisatin 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 most productive 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 transations : Financial market provide valuable information about securities which helps in saving time, efforts and money and thus it reduces cost of transactions.
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 transations : 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 insruments of money market are as follows.

1. Treasury Bills : They are issued by the RBI on behalf of the Cenral 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 promissory note issued by large and credit worthy companies to vaise 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 & Fiancial institutions. They can be issued to individuals, Corportations 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 re issued for the first time. It is also known as the new issues market. The investros 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 Floatation 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 throughan advertisement in newspapers and magazines.

2. Offer for sale : Under this method securities are offerecd 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-intial public offer. SEBI registered brokers have to be appointed for the purpose of

 

Financial Market is a market for creation and exchange of financial assets like shares, bonds etc. It helps in mobilising savings and channelizing them into the most productive uses.
CBSE Class 12 Business Studies Financial Markets Notes Set B
 
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 are repaid at par. They are available for a minimum amount of Rs. 25000 and in multiples thereof. They are also known as Zero Coupon Bonds. They are negotiable instruments i.e. they are freely transferable.
 
2. Commercial Paper: They are short term unsecured promissory notes issued by large credit worthy companies to raise short term funds at lower rates of interest than market rates. They are negotiable instruments transferable by endorsement and delivery with a fixed maturity period of 15 days to one year.
 
This source is usually used for- 
(i) Working Capital requirements 
(ii) Seasonal needs 
(iii) Bridge financing
 
3. Call Money: It is short term finance repayable on demand, with a maturity period of one day to 15 days, used for interbank transactions. 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 buyer it becomes 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 parts:
 
1. Primary Market
It deals with the new securities which are issued for the first time. It is also known as the New Issue Market.
 
Methods of Floatation of New Issues in Primary Market
 
1. Offer through Prospectus/ Initial Pubic Offer : 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 security 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 resells 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 an 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..
 
Secondary Market
It is also known as the stock market or stock exchange where purchase and sale of existing securities takes place. They are located at specified places and both the buying as well as selling of securities takes place.
CBSE Class 12 Business Studies Financial Markets Notes Set B
 
Stock Exchange/Share Market
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.
 
Following are some of the important functions of a Stock Exchange :-
 
1. Providing liquidity and Marketability to Existing Securities : Stock Exchange provides 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. Spreading of Equity Culture : Stock exchange helps in educating public about investments in securities which leads to spreading of Equity culture.
 
5. Providing Scope for Speculation : Stock exchange provides scope within the provisions of law for speculation in a restricted and controlled manner.
Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are famous stock exchanges in India.
 
Trading and Settlement Procedure on a Stock Exchange
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. Opening Demat Account with Depository.
3. Placing the order:After selecting a broker, the investors specify the type and number of securities they want to buy or sell.
4. Executing the order:The broker will buy or sell the securities as per the instructions of the investor.
 
Depository Services and DEMAT Accounts :
 
1. Depository Services: ‘Depository is an institution/organization which holds securities (e.g. shares, debentures, bonds, mutual funds etc.) in electronic form, in which trading is done. The services provided by a Depository are termed as ‘Depository Services’. At present there are two depositories in India: NSDL. (National Securities Depository Ltd.) and CDSL (Central Depository Services Ltd.).
 
Services provided by Depository
(i) Dematerialisation (usually known as demat) is converting physical certificates to electronic form.
(ii) Rematerialisation, known as remat, is reverse of demat, i.e getting physical certificates from the electronic securities.
(iii) Transfer of securities, change of beneficial ownership.
 
Demat Account
Demat account is the abbreviation of ‘Dematerialized Account’. Dematerialized account refers to an account which an Indian citizen must open with the depository participant (banks, stockbrokers) to trade in listed securities in electronic form wherein one can hold shares of various companies in the Dematerialized {electronic} form. Access to De-mat account requires an internet password and a transaction password. Transfer and purchase of 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. It seeks to protect the interest of investors in new and second hand securities.
 
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 mal-practices in trade such as insider trading.
4. To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers etc.
 
Functions of SEBI
The SEBI performs three important functions
1. Regulatory functions: These functions are performed by SEBI to regulate the business in stock Exchange.
2. Developmental functions: These functions are performed by SEBI to promote and develop activities in stock market.
3. Protective functions: These functions are performed by SEBI to protect the interest of investors and provide safety of investments.

 

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Key Concepts in nutshell:

CONCEPT OF FINANCIAL MARKET:

It refers to the market which creates and exchanges financial assets.

FUNCTIONS OF FINANICIAL MARKET

1. Mobilization of savings and channeling them into the most productive uses: A financial market facilitates the transfer of savings from savers to investors (industries)

2.Facilitates price discovery: In the financial market, the households are suppliers of funds and business firms represent the demand. The interaction between them helps to establish a price for the financial asset which is beingtraded in that particular market.

3. Provide liquidity to financial assets: Financial markets facilitate easy purchase and sale of financial assets. In doing so they provide liquidity to financial assets, so that they can be easily converted into cash whenever required.

4. Reduce the cost of transactions: Financial markets provide valuable information about securities being traded in the market. It helps to save time, effort and money. 

Financial Markets

1. Treasury Bill (Tbills): It is basically an instrument of short‐term borrowing by the Government of India maturing in less than one year. They are also known as Zero Coupon Bonds.

2. Commercial Paper: It is a short‐term unsecured promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period. It is issued by large and creditworthy companies to raise sort‐term funds at lower rates of interest than market rates. It usually has a maturity period of 15 days to one year.

3. Call Money: It is a short‐term finance repayable on demand, with a maturity period of one day to fifteen days, used for inter‐bank transactions. It is a method by which banks borrow from each other to be able to maintain the cash reserve ratio.

4. Certificate of Deposit (CD): It is a unsecured, negotiable short‐term instruments in bearer form, issued by commercial banks and development financial institutions. It can be issued to individuals, corporations and companies.

5. Commercial Bill (Trade Bill): It is a short‐term , negotiable, self‐liquidating instrument which is used to finance the credit sales of firms. The bill can be discounted with a bank if the eller (drawer) needs funds before the bill maturit

Financial Markets

TYPES OF CAPITAL MARKET:

Primary Market: It is also known as the new issues market. It deals with new securities being issued for the first time. A company can raise capital through the primary market in the form of equity shares, preference shares, debentures, loans and deposits.

Secondary Market: It is also known as stock market or stock exchange or second‐hand market. It is a market for the purchase and sale of existing securities.

Financial Markets

Difference between Primary Market and Secondary Market

Following are the methods of raising capital from the primary market :

• 1. Public issue through prospectus: under this method the company wanting to raise capital issues a prospectus to inform and attract the investing public. It invites prospective investors to apply for the securities.

 2.Offer for sale: under this method the sale of securities takes place in two steps. In the first step the company sells the entire lot of shares to the intermediary firms of stock brokers at an agreed price .In the second step, the intermediary resells these shares to investors at a higher price.

 3. Private placement: In private placement the entire lot of new securities is purchased by an intermediary at a fixed price and sold not to the public but to selected clients at a higher price.

• 4 .Rights issue (for existing companies: This is the offer of new shares (additional shares) by an existing company to the existing shareholders. The shareholder may either accept the offer for himself or assign to another. A rights issue to the existing shareholders is a mandatory requirement.

 
MCQs for NCERT Class 12 Business Studies Financial Markets
 
I. Multiple choice questions.
 
Question. Instruments with a maturity period of less than one year are traded in the ................... .
(a) capital market 
(b) Bombay stock exchange
(c) money market 
(d) National stock exchange
Answer : B
 
Question. Which of the following money market instruments are also known as zero coupon bond?
(a) Treasury bills 
(b) Certificates of deposits
(c) Commercial papers 
(d) Call money
Answer : A
 
Question. Primary and secondary markets ....................... .
(b) Compete with each other
(c) Complement each other
(d) Function independently
(e) Control each other.
Answer : B
 
Question. Which of the following is not a function of SEBI?
(f) Registration of brokers and sub-brokers
(g) Undertaking measures to develop finanical markets
(h) Prohibition of insider trading
(i) Holding securities in electronic form.
Answer : D
 
Question. Hari has 200 shares of Reliance industries. Reliance comes out with a fresh issue of share and Hari received an offer to buy 1 more share of Reliance for every two shares held by him. Which type of issue is discussed here:
(j) e-IPO’s 
(b) Rights issue
(c) Private placement 
(d) Offer for sale
Answer : C
 
Question. is the full form of CDSL.
(a) Central Depository Securities Ltd.
(b) Control Delhi Services Ltd.
(c) Central Deposit Services Ltd.
(d) Central Depository Services Limited.
Answer : D
 
Question. In which year was the SEBI established by the Government of India? 
(a) 1980 
(b) 1988
(c) 1992 
(d) 1993
Answer : D
 

 

II. Fill in the blanks:
1. Treasury bills are available for a minimum amount of ................. and in multiples there of.
2 is a market for the creation and exchange of financial assets.
3 is short term finance used for inter bank transactions.
4 is an institution which provides a platform for buying and selling of existing securities.
5. In India, there are ......................... depositories.
 
Answer : 1. 25,000
2. Financial market
3. Call money
4. Stock exchange
5. two (2)

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