CBSE Class 12 Business Studies Financial Markets Worksheet Set B

NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market Short Answer Type Questions

Question. State any three Protective Functions of SEBI?
Answer: Three protective functions of SEBI are as follows:
(i) Prohibition of fraudulent and unfair trade practices like making misleading statements, price rigging, etc.
(ii) Controlling insider trading and imposing penalties for such practices.
(iii) Undertaking steps for investors’ protection like registration of brokers, audit of stock exchanges, registration of mutual funds, etc.

Question. Mr. Sanjay Nehra was the Chairman of ‘Taran Bank.’ The bank was earning good profits. Shareholders were happy as the bank was paying regular dividends. The market price of their shares was also steadily rising. The bank was about to announce taking over of ‘Vena Bank.’ Mr. Sanjay Nehra knew that the share price of ‘Taran Bank’ would rise on this announcement. Being a part of the bank, he was not allowed to buy shares of the bank. He called one of his rich friends Sudhir and asked him to invest `5 crores in the shares of his bank promising him the capital gains. As expected the share prices went up by 40% and the market price of Sudhir’s shares was now `7 crores. He earned a profit of `2 crores. He gave ₹ 1 crore to Mr. Sanjay Nehra and kept ₹ 1 crore with himself. On regular inspection and by conducting enquiries of the brokers involved, Securities and Exchange Board of India (SEBI) was able to detect this irregularity. The SEBI imposed a heavy penalty on Mr. Sanjay Nehra. By quoting the lines from the above paragraph, identify and state any two functions that were performed by SEBI in the above case.
Answer: Lines from the Paragraph :
(i) “He called one of his rich friends Sudhir and asked him to invest ₹ 5 crores in shares of his bank.”
(ii) “On regular inspection and by conducting enquiries of the brokers involved, SEBI was able to detect this irregularity”. Functions that were performed by SEBI in the above case were :
(a) Regulatory function : ‘On regular inspection and by conducting enquiries of the brokers involved, Securities and Exchange Board of SEBI can call for information by undertaking inspection, conducting enquiries and audits of stock exchanges and intermediaries.
(b) Protective function : ‘The SEBI imposed a heavy penalty on Vikas Mehra. SEBI controls insider trading and imposes penalties for such practices.

Question. State the protective functions of Securities and Exchange Board of India.
Answer: Protective functions of SEBI :
(i) It prohibits fraudulent and unfair trade practices like misleading statements, manipulations, price rigging etc.
(ii) It controls insider trading and imposes penalties for such practices.
(iii) It undertakes steps for investor protection.
(iv) It promotes fair practices and code of conduct in securities market.

Question. Keeping in mind the emerging nature of the securities market in India, Securities and Exchange Board of India (SEBI) was entrusted with the twin task of regulation and development of securities market. Out of this, state the developmental functions of Securities and Exchange Board of India (SEBI).
Answer:  Developmental Functions of SEBI :
(i) It trains intermediaries of the securities market.
(ii) It conducts research and publishes information useful to all the market participants.
(iii) It undertakes measures to develop the capital markets by adapting a flexible approach.

Question. Supriya’s grandmother, who was unwell, called her and gave her a gift packet. Supriya opened the packet and saw many crumpled share certificates inside. Her grandmother told her that they had been left behind by her late grandfather. As no trading is now done in physical form, Supriya wants to know the process by adopting which she is in a position to deal with these certificates.
(i) Identify and state the process.
(ii) Also give two reasons to Supriya why dealing with shares in physical form had been stopped.
Answer:
(i) De-materialisation : It is a process where securities held by the investor in physical form are cancelled and the investor gives an electronic entry or number so that she/he can hold it as an electronic balance in an account.
(ii) Problems with dealing in physical form :
(a) Theft.
(b) Fake/forged transfers.
(c) Transfer delays.
(d) Paperwork associated with share certificates or debentures held in the physical form.

Question. State any three Developmental Functions of SEBI. 
Answer: Developmental functions of SEBI are as follows :
(i) Training : Training of intermediaries of securities markets for their professional growth.
(ii) Developing Capital Markets : Undertaking measures to develop the capital markets by adopting a flexible approach.
(iii) Conducting Research : SEBI encourages research for improving the functioning of capital market, for streamlining the activities of stock exchange, for developing and strengthening the capital markets, etc.

Question. ‘Efficient functioning of stock exchange creates a conductive climate for active and growing primary market for new issues as well as for an active and healthy secondary market.’ In the light of this statement, state any three functions of a stock exchange. 
OR
‘The Stock Exchange performs many vital functions in today’s commercial world.’ Explain any three such functions. 
OR
Stock exchange not only contributes to the economic growth, but performs many other functions. Explain any three such functions. 
OR
Explain any three functions of stock exchange.
Answer:
Functions of Stock Exchange :
(i) Providing liquidity and marketability : Stock exchange provides common platform to buyers and sellers to buy and sell securities.
(ii) Pricing of securities : The forces of demand and supply in a stock market determine the price of a financial security.
(iii) Safety of transaction : Stock exchange regulates membership and transactions by well-defined legal framework. Thus, ensures safety of transaction for the investors.
(iv) Contributing to economic growth : Through the process of disinvestment and reinvestment, the savings are channelised into the productive investments leading to the capital formation and economic growth.
(v) Spreading of equity cult : Stock exchange ensures wider share ownership by providing better trading practices, educating people about new investment and regulating new issues.
(vi) Providing scope for speculation : Stock exchange provides certain degree of healthy speculation to ensure liquidity and price increase in securities.

Question. State the first four steps which are involved in the screen-based trading for buying and selling of securities in the secondary market.
Answer: Following are the first four steps in the screen-based trading for buying and selling of securities in the secondary market :
(i) The investor has to approach a registered broker or sub-broker and sign a broker-client agreement and a client registration form before placing an order to buy or sell securities.
(ii) The investor has to open a “demat” account or “beneficial owner” account with a depository participant for holding and transferring securities in the demat form.
(iii) The investor then places an order with the broker to buy or sell shares; the broker will go ahead with the deal and issue the order confirmation slip to the investor. (iv) The broker then will go online and connect to the main stock exchange and match the share and best price available.

Question. ‘Money market is essentially a market for short term funds’. In the light of this statement, state any three features of money market.
Answer: Features of money market :
(i) It is a market for short-term funds which deals in monetary assets whose period of maturity is up to one year.
(ii) Money market instruments are highly liquid.
(iii) Money market instruments are less risky.

Question. What is meant by ‘Capital Market’? Name the two segments of Capital Market. 
Answer: Capital Market : Capital market includes all those organisations, institutions and instruments that provide long-term and medium term funds through shares, bonds, debentures, etc., It consists of development banks, commercial banks and stock exchanges.
Two segments of capital market :
(i) Primary Market : Primary market refers to the market wherein securities are sold for the first time. It is also known as New Issue Market. The securities through which a company can raise capital in primary market are : Equity Shares, Preference Shares, Debentures, etc.
(ii) Secondary Market : Secondary market refers to the market for sale and purchase of previously issued securities. It is also known as the Stock Market or Stock Exchange. In this market, securities are exchanged between the investors.

Question. Saqib Ltd. is a large creditworthy company operating in the Kashmir Valley. It is an export oriented unit, dealing in exclusive embroidered shawls. The floods in the Valley have created many problems for the company. Many craftsmen and workers have been dislocated and raw material has been destroyed. The firm is therefore, unable to get an uninterrupted supply of raw material, and the duration of the production cycle has also increased. To add to the problems of the organisation, the suppliers of raw material, who were earlier selling on credit, are asking the company for advance payment or cash payment on delivery. The company is facing a liquidity crisis. The CEO of the company feels that taking a bank loan is the only option with the company to meet its short term shortage of cash. As a finance manager of the company, name and explain the alternative to bank borrowing that the company can use to resolve the crisis.
Answer: 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 the large and creditworthy companies to raise short-term funds at lower rate of interest than market rates. The issuance of commercial paper is an alternative to bank borrowing for large companies that are generally considered to be financially strong.

Question. State any four differences between Primary market and Secondary Market. 
Answer:
Primary and Secondary Markets — A Comparison

Question. Differentiate between Capital Market and Money Market on the basis of :
(i) Liquidity
(ii) Duration
(iii) Expected Return
(iv) Safety
Answer:

Question. ‘Ganesh Steel Ltd.’ is a large and credit worthy company manufacturing steel for the Indian market. It now wants to cater to the Asian market and decides to invest in new hi-tech machines. Since the investment is large, it requires long-term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge floatation cost. To meet the expenses of floatation cost, the company decides to tap the money market.
(i) Name and explain the money-market instrument the company can use for the above purpose.
(ii) What is the duration for which the company can get funds through this instrument?
(iii) State any other purpose for which this instrument can be used.
Answer:
(i) Commercial paper – It is a short term unsecured promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period.
(ii) 15 days to one year.
(iii) It is used to provide short term funds for seasonal and working capital needs of the business.

Question. W hat is meant by ‘Capital Market’? Name the two types of capital market and differentiate between the two on any four basis.
Answer: Meaning of Capital Market : Capital Market means the facilities and institutional arrangements through which long-term funds, both debt and equity, are raised and invested. Types of Capital Market : Primary market and secondary market. Difference between Primary Market and Secondary Market : 

Question. What is meant by ‘New Issue Market’? Explain the various methods of flotation of new securities issues in this market.
Answer: The primary market is also known as the new issues market. It deals with new securities being issued for the first time. The essential function of a primary market is to facilitate the transfer of investment funds from savers to entrepreneurs seeking to establish new enterprises or to expand existing ones through the issue of securities for the first time. The investors in this market are banks,financial institutions, insurance companies, mutual funds and individuals.

NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market Long Answer Type Questions: 

Question. Explain the trading procedure on a stock exchange. 
Answer: Trading procedure on a stock exchange is as follows :
(i) Selection of a Broker : A SEBI registered broker, who is a member of a stock exchange, is selected to buy/sell securities on behalf of the investor. The broker can be an individual, partnership firm or corporate.
(ii) Opening a Demat Account : There are two depositories in India - NSDL (National Securities Depositories Ltd.) and CDSL (Central Depository Services Ltd.). A demat account is opened by the investor with depositary participant (bank stock broker) to trade in listed securities in electronic form and maintain the balance of securities with depositories.
(iii) Placing the order : The order to buy or sell specific security is to be communicated to the broker either personally or through telephone, e-mail, etc.
(iv) Executing the order : The broker buys or sells the specified securities as instructed by the investor and they issue a contract note. It contains the name & prices of securities, details of the parties, brokerage charged, etc.
(v) Settlement : A T+2 rolling settlement cycle is followed in Indian stock market. Delivery of shares is made in dematerialised form and each exchange has its own clearing house which assumes all settlement risk.

Question. “To promote orderly and healthy growth of the securities market and protection of the investors, Securities and Exchange Board of India was set up.” With reference to this statement, explain the objectives of Securities and Exchange Board of India.
Answer: Objectives of SEBI are :
(i) To regulate stock exchanges and the securities industry to promote their orderly functioning.
(ii) To protect the rights and interests of the investors, particularly individual investors and to guide and educate them.
(iii) To prevent trading malpractices and achieve a balance between self-regulation and statutory regulation.
(iv) To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers, etc. with a view to making them competitive and professional.
(v) To provide a market place in which the issuers can raise finances in an easy, fair and efficient manner

Question. What does the abbreviation ‘SEBI’ stand for? Explain the term Sensex. How many shares are included in the Sensex?
Answer: SEBI : Securities and Exchange Board of India. Sensex : Sensex stands for Sensitivity Index. Sensex is the benchmark index of BSE. It is a useful guide for investors in the stock market. If the Sensex rises, it
indicates that the market is doing well and investors become optimistic of the future performance of the economy. Sensex includes shares of thirty companies, most actively traded.

Question. State any five regulatory functions of Securities and Exchange Board of India.
Answer: Regulatory functions of Securities and Exchange Board of India are :
(i) It registers brokers and sub-brokers and other players in the market.
(ii) It registers collective investment schemes and mutual funds.
(iii) It regulates stock brokers, portfolio exchanges, underwriters and merchant bankers.
(iv) It regulates takeover bids by the companies.
(v) It calls for information by undertaking inspection, conducting enquiries and audit of stock exchanges and intermediaries.
(vi) It levies fee or other charges for carrying out the purposes of the SEBI Act, 1992.
(vii) It performs and exercises such powers under Securities Contract (Regulation) Act, 1956 as may be delegated by the Government of India.

Question. Differentiate between ‘Capital Market’ and ‘Money Market’ on the following basis :
(i) Participants,
(ii) Instruments,
(iii) Investment outlay,
(iv) Duration and
(v) Liquidity. 
OR Differentiate between ‘Capital Market’ and ‘Money Market’ on the basis of :
(i) Safety,
(ii) Expected return,
(iii) Meaning,
(iv) Instruments and
(v) Duration.
OR
Differentiate between ‘Capital Market’ and ‘Money Market’ on the following basis :
(i) Expected Return
(ii) Security
(iii) Liquidity
(iv) Duration and
(v) Instruments
OR Differentiate between ‘Capital Market’ and ‘Money Market’ on the following basis :
(i) Participants,
(ii) Instruments,
(iii) Investment outlay,
(iv) Duration and
(v) Liquidity. AE
OR
Differentiate between ‘Capital Market’ and ‘Money Market’ on the basis of the following :
(i) Safety
(ii) Expected Return
(iii) Investment outlay
(iv) Participants
(v) Duration. 
OR
Differentiate between ‘Capital Market’ and ‘Money Market’ on the basis of :
(i) Investment Outlay;
(ii) Safety; and
(iii) Liquidity.
OR Differentiate between ‘Capital Market’ and ‘Money Market’ on the basis of :
(i) Liquidity;
(ii) Instruments; and
(iii) Expected Return.
OR Differentiate between ‘Capital Market’ and ‘Money Market’ on the basis of :
(i) Safety;
(ii) Liquidity; and
(iii) Duration.
OR Differentiate between ‘Capital Market’ and ‘Money Market’ on the basis of :
(i) Participants;
(ii) Instruments; and
(iii) Safety.
Answer: 

Question. State any four methods of floatation of new issues in the primary market. 
OR
Explain any four methods of floating new issues in the primary market.
OR
Define primary market. State any four methods of issuing securities in the primary market. 
Answer: There are various methods of floating new issues in the primary market :
(i) Offer through Prospectus : This 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 the newspapers and in the magazines. The issues may be underwritten and also are required to be listed on at least one recognised stock exchange. The contents of the prospectus have to be in accordance with the provisions of the Companies Act and SEBI Disclosure and Investor Protection Guidelines.
(ii) Offer for Sale : Under this method, securities are not issued directly to the public but are offered for sale through the intermediaries like issuing houses or stock brokers. In this case, a company sells securities in bulk at an agreed price to brokers who, in turn, resell them to the investing public.
(iii) Private Placement : Private Placement is the allotment of securities by a company to institutional investors and some selected individuals. It helps to raise capital more quickly than a public issue. Access to the primary market can be expensive on account of various mandatory and non-mandatory expenses. Some companies, therefore, cannot afford a public issue and choose to use private placement.
(iv) Rights Issue : This is a privilege given to existing shareholders to subscribe to a new issue of shares according to the terms and conditions of the company. The shareholders are offered the ‘Right’ to buy new shares in proportion to the number of shares they already possess.
(v) e-IPOs : A company proposing to issue capital to the public through the online system of the stock exchange has to enter into an agreement with the stock exchange. This is called an Initial Public Offer (IPO). SEBI registered brokers have to be appointed for the purpose of accepting applications and placing orders with the company. The issuer company should also appoint a registrar to the issue having electronic connectivity with the exchange. The issuer company can apply for listing of its securities on any exchange other than the exchange through which it has offered its securities. The lead manager co-ordinates all the activities amongst intermediaries connected with the issue.

Question. State any four functions of ‘Secondary Market’.
Answer: Functions of Secondary Market :
(i) Providing Liquidity and Marketability to Existing Securities : The basic function of a stock exchange is the creation of a continuous market where securities are bought and sold. It gives investors the chance to disinvest and reinvest. This provides both liquidity and easy marketability to already existing securities in the market.
(ii) Pricing of Securities : Share prices on a stock exchange are determined by the forces of demand and supply. A stock exchange is a mechanism of constant valuation through which the prices of securities are determined. Such a valuation provides important instant information to both buyers and sellers in the market.
(iii) Safety of Transaction : The membership of a stock exchange is well regulated and its dealings are well-defined according to the existing legal framework. This ensures that the investing public gets a safe and fair deal on the market. (iv) Contributes to Economic Growth : Through this process of disinvestment and reinvestment, savings get channelised into their most productive investment avenues. This leads to capital formation and economic growth.
(v) Spreading of Equity Cult : The stock exchange can play a vital role in ensuring wider share ownership by regulating new issues, better trading practices and taking effective steps in educating the public about investments.
(vi) Providing Scope for Speculation : The stock exchange provides sufficient scope within the provisions of law for speculative activity in a restricted and controlled manner. It is generally accepted that a certain degree of healthy speculation is necessary to ensure liquidity and price continuity in the stock market.

Question. Give the meaning of the following money market instruments :
(i) Certificate of Deposit and
(ii) Commercial Bill. 
OR
Give the meaning of the following money market instruments :
(i) Treasury Bill and
(ii) Call Money.
OR
Explain the following money market instruments :
(i) Treasury Bill
(ii) Commercial Paper and
(iii) Call Money.
OR
Explain the following money market instruments :
(i) Commercial Paper and
(ii) Certificate of Deposit as money market instruments. 
OR
Explain the following money market instruments :
(i) Treasury Bill
(ii) Call Money as money market instruments. 
OR
Explain the following money market instruments :
(i) Call Money
(ii) Commercial Bill as money market instruments.
OR
Explain the following money market instruments :
(i) Treasury Bill and
(ii) Commercial Paper.
OR
Explain the following money market instruments :
(i) Certificate of Deposit,
(ii) Call Money.
OR
Explain the following money market instruments :
(i) Commercial Papers.
(ii) Commercial Bill.
OR
What is meant by ‘Money Market’? Explain any two instruments used in Money Market. 
Answer: Money Market is a market for short-term funds which deals in monetary assets whose period of maturity is upto one year. Following are the money market instruments : (i) Call Money : Call money is short-term finance repayable on demand with a maturity period of one day to fifteen days used for inter-bank transactions. It is primarily used by Commercial Banks to maintain a minimum cash balance known as Cash Reserve Ratio (CRR) as stipulated by the RBI.
(ii) Treasury Bills : Treasury bills (T-Bills) are issued by the Reserve Bank of India on behalf of the Government of India as a short-term liability, and sold to the banks and to the public. The issue period ranges from 14 to 364 days. T-Bills are negotiable instruments, i.e., they are freely transferable. They are issued at a discount and redeemable at par.
(iii) Trade Bills/Commercial Bills : Trade bills are bills drawn by one business firm to another to finance credit sales. They are self-liquidating as the drawee has to honour them on the date of maturity. They are freely marketable. If the seller requires funds before the maturity, he can get it discounted with the bank. It is known as commercial bill after acceptance of the trade bill by a Commercial Bank.
(iv) Commercial Paper : A commercial paper is an unsecured promissory note, issued by a corporate firm with a fixed maturity period which varies from 15 days to 12 months. Since a CP is unsecured, it is issued only by highly creditworthy, reputed leading firms. The original purpose of commercial paper is to provide short-term funds for seasonal and working capital.
(v) Certificate of Deposit : These are unsecured short term negotiable instruments issued in bearer form. These are issued by the banks against deposits kept by companies and institutions. The tenure ranges from 91 days to one year. These help to mobilise large amount of money for short period. 

Question. State the functions of the Financial Market. 
OR
State the functions performed by the Financial Market.
OR
“A financial market is for the creation and exchange of financial assets.” Explain any two of its functions.
OR
Describe any four functions of Financial Market.
OR Financial market plays an important role in the allocation of scarce resources in an economy by performing many important functions. Explain any four such functions.
Answer:
(i) Mobilisation of savings and channelising them into the most productive uses : A financial market facilitates the transfer of savings from savers to the investors. It gives savers the choice of different investments and thus helps to channelise surplus funds into the most productive use.
(ii) Facilitate price discovery : The forces of demand and supply help to establish a price for a commodity or service in the market. 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 being traded in that particular market.
(iii) Provide liquidity to the 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. Holders of assets can readily sell their financial assets through the mechanism of the financial market.
(iv) 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 that both buyers and sellers of a financial asset would have to otherwise spend to try and find each other. The financial market is thus, a common platform where buyers and sellers can meet for fulfilment of their individual needs.