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Class 12 Business Study Chapter 10 Financial Markets
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Financial Markets
Chapter: 10
PART – B
VERY SHORT TYPE QUESTIONS ANSWERS (1 MARK EACH)
1. Which is the oldest stock exchange in India ?
Ans : Mumbai Stock Exchange.
2. With which stock exchanges the terms ‘sensex’ and nifty are associated ?
Ans: ‘Sensex’ is associated with ‘Mumbai Stock Exchange’ and ‘Nifty is associated with ‘National Stock Exchange.’
3. Mention the statutory body for regulation of stock exchange in India.
Ans: SEBI.
4. In which year SEBI came into being ?
Ans: 1992
5. What type of instruments are traded in the money market ?
Ans: Instruments with a maturity of less than one year.
6. What is the other name of primary market ?
Ans: New Issue Market.
7. Mention two methods of floating securities by a company.
Ans: (i) Public issue through prospectus.
(ii) Offer for sale.
8. Mention two most commonly used money market instruments.
Ans: (i) Call Money or loans.
(ii) Treasury Bills.
9. Name the market for long-term funds.
Ans: Capital Market.
10. What is the duration of the instruments traded in the money market ?
Ans: More than one year.
1. Name any two buyers of commercial papers.
Ans: Commercial banks and insurance companies.
12. What is the full name of SEBI ?
Ans:Securities and Exchange Board of India.
13. What are the components of capital market ?
Ans: Organised and unorganised Capital Market.
14. Name the market where new securities are issued for the first time.
Ans: Primary Market.
15. Name the market which facilitates purchase and sale of old or existing securities.
Ans: Secondary Market.
16. Do treasury bills carry any rate of interest ?
Ans: Treasury bills do not carry any rate of interest. In Fact they are issued at a discount.
17. What is money market ? Explain.
Ans: Money market refers to the various firms and institutions that deal in short term securities known as ‘near money’. It is a mechanism through which short-term funds are loaned and borrowed and through which a large part of financial transactions of a particular country or of the world are cleared. It deals in financial instruments that have short direction and that are close substitutes of money.
18. What is capital market ?
Ans: Capital market is the market through which is concerned with long-term finance for industry and government. It consists of all channels through which the savings of the community are made available for industry and government. The savings of individuals and are converted into investments through capital issues by companies and public loans floated by government and semi government bodies. It is a market for financial assets that have a long or indefinite period of maturity. Financial assets include shares,debentures, bonds, long-term borrowing etc.
19. Write three nature of money market.
Ans: The three nature of money market are given below:
(i). Money market involves dealings in cash or liquid assets of short term nature.
(ii) It deals in financial assets (or instruments) that are close substitutes for money and could be converted into cash within a period or one year.
(iii) Dealing in money market may be conducted with or without the help of brokers or intermediaries.
20. Explain three characteristics of capital market.
Ans: Three characteristics of capital market are given below:
(i) Dealings in securities: Capital market deals in long term securities which maturity period is more than one year. It also deals in both marketable and non-marketable securities.
(ii) Investors: Capital market includes both individual investors and institutional investors like mutual funds, life insurance companies, development banks, trusts, provident fund organisations etc.
(iii) Intermediaries: Capital market functions through several types of intermediaries, such as underwriters, bankers, mutual funds, stock brokers etc.
21. Write three objections of SEBI.
Ans: Three objectives of SEBI are given below:
(i) To promote fair dealings by the companies issuing securities.
(ii) To provide a degree of protection to investors and safeguard their interests so that there is a steady flow of savings into the market.
(iii) To ensure development of capital market where companies can raise funds at low costs.
22. Explain three functions of financial market.
Ans: Three functions of financial market are discussed below:
(i) Mobilisation of Savings: A financial market offers mobility to the savings of people. It helps them to invest their savings in various financial assets or instruments and earn income and capital appreciation. It mobilises the savings of people and Channa Lise them into the most productive uses.
(ii) Pricing of Financial Instruments: A financial market includes both the suppliers and investors of funds. The demand and supply of funds determine the price of various financial instruments.
(iii) Liquidity of Financial Assets: A financial market provides ready market for the sale and purchase of financial assets. The investors can invest their savings in the long-term investments which could be easily sold in the market whenever desired.
23. Explain three features of stock exchange.
Ans: Three features of stock exchange are given below:
(i) Stock exchange is a market where dealings take place in shares, debentures and bonds issued by the companies, corporations, government, etc.
(ii) Only those securities could be treated that are included in the official list of stock exchange. It also deals in government securities.
(iii) The purpose of establishing a stock exchange is to assist, to regulate and to control the business in securities.
24. Describe three major defects in trading in stock exchanges.
Ans: The three major defects in trading in stock exchange are given below:
(i) Unhealthy speculation: Sometimes due to unhealthy speculation of stock exchanges, market becomes doubtful and the economy of the country goes to disaster.
(ii) Losses to Investors: Due to speculation a lots of up and downs take place in the prices of securities. This results in great losses to investors.
(iii) Economic difficulties to the companies: Stock exchange publish the prices of securities regularly. If there is decrease in prices of securities of few companies than difficulties have to be faced by such companies in getting loans from financial institutions or in new issue of shares or debentures.
25. What is SEBI ?
Ans: The SEBI short for Securities and Exchange Board of India is often in the new because of its supervisory and regulatory role over the functioning of stock exchanges spread throughout the country. The SEBI has been set up as a statutory body under the SEBI Act 1992 with a view:
(i) to protect the interests of the investors in securities.
(ii) to promote the development of the securities market. and
(iii) to regulate the functioning of the securities market.
The SEBI assumed the status of an umbrella watch dog body over the entire financial services sector of the Indian economy.
26. Give three distinctions between money market and capital market.
Ans: The distinction between Capital Market and Money Market are listed below:
| Basis | Capital Market | Money Market |
| 1. Participants | Both individual investors and institutional investors. such as banks, trusts, mutual funds etc. can operate. | Only the institutional investors can operate in the money market. |
| 2. Constituents | These include new issue market, stock market, stock brokers and intermediaries. | These include call money market, bill market and discounting market. |
| 3. Liquidity | Liquidity is restricted in the capital market. | There is a very high liquidity in the money market. |
27. What is primary or New Issue Market ?
Ans: Primary or New Issue Market is the market where new securities (shares, bonds, debentures etc.) are sold or purchased for the first time. The new issue market should be distinguished from the secondary market which deals in second hand securities i.e. securities which have already have been issued by companies, corporations and government. The primary market plays an important role in mobilising the savings of investors and channelising them into productive ventures.
28. What is secondary market ?
Ans: Secondary market deals in existing securities. It deals in existing securities like shares, bonds, debentures etc. which have already been issued in the primary market. That is why, existing securities are called second-hand securities. The securities available with the investors can be sold through brokers in the stock exchange. Secondary market is also known as stock exchange market. It operates as per rules and guidelines issued by the Securities and Exchange Board of India (SEBI).
29. Distinguish between primary and secondary market.
Ans: The distinction between primary and secondary market are listed below:
| Basis | Primary Market | Secondary Market |
| 1. Nature | It is concerned with the issue or sale of new securities by the companies to the investors. | It is concerned with trading in the existing securities only. |
| 2. Purpose | The purpose of primary market is to ensure flow of funds from the inves tors to the entrepreneurs. | Its purpose is to provide for liquidity of securities. |
| 3. Sequences | New securities are issued to the investors before they could be traded in the stock exchange. | The securities issued by company can be sold and purchased time and again in the stock exchange. |
C. SHORT TYPE QUESTIONS ANSWERS TYPE – II(4 MARKS EACH)
30. “Financial market players in important role in the allocation of scarce resources in an economy by performing many important functions”. Explain any four such functions.
Ans: The basic functions of financial markets are as follows:
(i) Mobilisation of Saving: A financial market offers mobility to the saving of people. It helps them to invest their savings in various financial assets or instruments and earn income and capital appreciation. Financial markets mobilise the saving of people and channelise them into the most productive uses.
(ii) Pricing of Financial Instruments: A financial market includes both the suppliers and investors of funds. The demand and supply of funds determine the price of various financial instruments.
(iii) Liquidity of Financial Assets: A financial market provides ready market for the sale and purchase of financial assets. The investors can invest their savings in the long-term investments which could be easily sold in the market, whenever desired.
(iv) Low Transaction Costs: A financial market is a common platform where buyers and sellers enter into transactions. Thus, financial markets facilitate transactions in financial assets at very low cost.
31. State any four features of capital market.
Ans: The broad features of capital market are as follows:
(i) Dealings in securities: Capital market deals in long term securities which maturity period is more than one year. It also deals in both marketable and non-marketable securities.
(ii) Investors: Capital market includes both individual investors and institutional investors like mutual funds, life insurance companies, development banks, trusts, provident fund organisations etc.
(iii) Intermediaries: Capital market functions through several types of intermediaries, such as underwriters, bankers, mutual funds, stock brokers etc.
(iv) Flow of Capital: Capital market facilitates flow of capital from the investors to the borrowers. It provides a forum for transactions between those who demand capital and those who supply capital.
32. State any four services of stock exchange to the society.
Ans: The four services of stock exchange towards the society are as follows:
(i) Stock exchange generates economic growth by encouraging investors to invest their savings in securities. It encourages capital formation in the country.
(ii) Stock exchange provides a forum for raising public debt which is required for projects of national importance.
(iii) Stock exchange helps in the optimum utilisation of score financial resources.
(iv) By encouraging marketability of securities, the stock exchange upholds the position of efficiently managed companies.
33. State any four functions of NSEI.
Ans: The four functions of National Stock Exchange of India (NSEI) are given below:
(i) It ensure equal access to investors all over the country through an appropriate communication network.
(ii) It provide a fair, efficient and transparent securities market to investors using electronic trading systems.
(iii) It establish a nationwide trading facility for equities, debt instruments and hybrids.
(iv) It enable shorter settlement cycles and book entry settlement system.
34. Briefly explain the significance of Over the Counter Exchange of India.
Ans: The OTCEI plays an important role in the Indian securities market.
Its advantages are discuss below:
(i) The ringless nature of the OTC exchange allows counters to be spread throughout the country. An investor can transact in any OTC scrip through any counter.
(ii) The OTC exchange provides for quick settlement. The transactions are completed within a week. The delivery of shares and payment are completed within a week.
(iii) The OTC exchange improves the confidence of investors because of speedy transactions and settlements.
(iv) It provides transparency in dealing as buying and selling prices are available on the computer screen.
35. Enumerate any four functions of the SEBI.
Ans: The four functions of Securities and Exchange Board of India (SEBI) are given below:
(i) It promotes investor’s education and training of intermediaries of securities market.
(ii) It provides guidelines for fair trading in stock exchanges and any other securities market.
(iii) It checks fraudulent and unfair trade practices relating to securities market.
(iv) It registers and regulates the working of collective investment schemes including mutual funds.
36. Briefly explain the role of he SEBI in regulating the capital market in India.
Ans: The SEBI has been making endless efforts for the growth and smooth functioning of the Indian capital market. It has also played a vital role in the protection of investors.
The role played by SEBI are :
(i) It promotes investors education and training of intermediaries of securities market.
(ii) Formation of advisory committees for primary and secondary capital market.
(iii) It checks fraudulent and unfair trade practices relating to securities market.
(iv) Issue of guidelines for disclosure and investor protection.
(v) It promotes and regulates self-regulatory organisation.
(vi) Making guidelines for entry of foreign institutional investors.
37. State any four protective function of SEBI.
Ans: Four pro-active functions of SEBI are given below:
(i) It checks ‘price rigging’ by prohibiting unfair practices in the securities market. It keep a watch on the operators so that they may not inflate or depress the market price of securities.
(ii) It checks fraudulent practices by the companies entering the market with fresh issues of securities.
(iii) It has prohibited ‘insider trading’. It takes action against the insiders (i.e. promoters and directors of the company) who make use of internal information to deal in company’s securities and thereby earn huge profits.
(iv) The SEBI has undertaken several steps (such as issue of booklets and training of investors) to educate the investors.
38. Define stock exchange and explain three features of stock exchange.
Ans: Stock exchange is a platform where dealings take place in shares, debentures and bonds issued by the private sector companies, public enterprises, government etc. Such shares, bonds and debentures are called securities. Only those securities could be traded that are included in the official lists of stock exchange. Stock exchange is also called stock market or securities.
The features of stock exchange are as under :
(i) Stock exchange is run by an association, organisation or body of individuals.
(ii) It is a place where securities issued by companies, government and other authorities are purchased and sold.
(iii) It operates under the rules and guidelines issued by Securities and Exchange Board of India (SEBI).
E. LONG TYPE QUESTIONS ANSWERS TYPE-I (5 MARKS EACH)
39. “In today’s commercial world, the stock exchange performs many vital functions which leads the investors towards positive environment.” Explain how by giving any four reasons.
Ans: The commonly used methods of raising capital through issue of securities are:
(i) Public Issue through Prospectus: The first time issue of securities by a company is known as initial public offer (IPO). The IPO is made to the public by issuing a prospectus. That is why, it is also known as public issue. A prospectus is a document that contains terms and conditions for the sale of securities and it invites the prospective investor to apply for the securities.
(ii) Offer for Sale: A company may issue its new securities to its promoters or intermediaries (or stock brokers) at a specified price. Thus, the issuing company is assured of the sale of its securities and is also saved of the lengthy process involved in making a public offer.
(iii) Private Placement: Under this method, a company sells its securities privately to a small group of investors such as financial institutions, brokers, financiers, etc. Private placement is common in case of collaboration agreements with the domestic and foreign companies. This method saves the costs of public issue.
(iv) Rights Issue: If a company wants additional capital, it can offer equity shares to the existing shareholders. Such an issue is know as ‘rights issue’. It provides a privilege to the existing shareholders to purchase additional shares in proportion to the existing shares held by them.
(v) e-IPO: Under this method, a company can issue fresh capital through the online system of stock exchange. Since online system uses electronic technology, the initial public offer (IPO) by the company is known as e-IPO. For this, the issuing company has to obtain the approval of SEBI and enter into an arrangement with a stock exchange.
40. Explain the Regulatory and Development functions of Securities and Exchange Board of India.
Ans: The SEBI plays the role of a regulatory by performing the. following functions:
(i) It regulates business in the securities market by enforcing its rules and regulations.
(ii) It registers and regulates the working of collective investment schemes including mutual funds.
(iii) It promotes and regulates self-regulatory organisations.
The SEBI performs the following functions for the development of capital market :
(i) It undertakes programmes for the training ries in the securities market.
(ii) It has permitted internet trading through the registered stock brokers.
(iii) It has made optional the underwriting of new issues.
41. Why was Securities and Exchange Board of India set up ? Explain any four objectives of SEBI.
Ans: SEBI was set-up in 1988 to regulate the function of the securities market with a view to promote orderly and healthy development in the stock market. SEBI was not able to work as a watch-dog and could not control capital market effectively. As a result, it was given legal status in May 1992, as a body corporate having legal existence and perpetual succession.
The objectives of SEBI are explained below:
(i) Protect interest of Investors: SEBI was mainly set up to protect the interest of investors. SEBI aims at providing true and fare position of companies to investors so that they are able to make proper decisions.
(ii) Promotion and Development of Securities Market: SEBI aims to promote healthy security market in India. It has been instrumental in establishing transparent trading procedures. It regulates stock exchanges and security markets to promote proper functioning.
(iii) Regulating Securities Market: SEBI was established to regulate the working of security market, stock exchanges, brokers and other intermediaries.
(iv) Mobilisation and Allocation of Resources: It helps mobilisation and allocation of resources through securities market. It promotes healthy competition in the market and also guides for the meaningful use of funds.
42. Explain the objectives of National Stock Exchange of India.
Ans :The objectives of National Stock Exchange of India are given below:
(i) Nation-wide Trading Facility: NSEI was established to provide a nation-wide trading facility for equities, debt instruments etc. This facility was to regulate the prices of scripts on a national basis. In order to avoid regional disadvantages and promote transparency in pricing NSE was established.
(ii) At per with International Standards: NSEI system is at par with international standards in dealing relating to market practices, products, technology etc.
(iii) Electronic Settlement: The manual system of settlements was lengthy and time consuming. NSE has introduced electronic settlement system which is easy and quick.
(iv) Regulation of Transactions: NSE aims to have an inbuilt mechanism which regulates trading. NSEI system operates as per instructions given in advance.
(v) Eliminating Undercutting: The brokers at regional stock exchange used to earn profits by undercutting prices of scripts. NSEI is an exchange operating in the whole country with the help of internet network so such practices are eliminated.
43. State any five functions of stock exchange.
Ans: The five functions of stock exchange are discussed below:
(i) Providing Liquidity to Securities: Stock exchange provides a ready market for the securities issued by various institutions. The investors can convert their money into securities and vice versa very quickly.
(ii) Mobilisation of Savings: Stock exchange helps in mobilisation of surplus funds of individuals, business firms and cooperatives for investment in popular securities. The stock brokers are always ready to help their client with their specialised services.
(iii) Pricing of Securities: Stock exchange helps in determining the price of various securities. The forces of demand and supply act freely in the stock exchange. The stock exchange helps the investors to know current market prices of various schemes.
(iv) Capital Formation: Stock exchange not only mobilises the existing savings but also induces the public to save money. It provides avenue for investment in various securities which yield higher return. This facilitates capital formation in the country.
(v) Control of Corporate Sector: Every company which wants its shares to be dealt in at the stock exchange has to follow the rules framed by the stock exchange in this regard.
44. State any five methods of floating new issues in the primary market.
Ans: The commonly used methods of floating new issues in the primary market are discussed below:
(i) Public Issue through Prospectus: The first time issues of securities by a company is known as initial public offer (IPO). The IPO is made to the public by issuing a prospectus. That is why, it is also known as public issue. A prospectus is a document that contains terms and conditions for the sale of securities and it invites the prospective investor to apply for the securities.
(ii) Offer for sale: A company may issue its new securities to its promoters or intermediaries (or stock brokers) at a specified price. Thus, the issuing company is assured of the sale of its securities and is also saved of the lengthy process involved in making a public offer.
(iii) Rights issue: If a company wants additional capital, it can offer equity shares to the existing shareholders. Such an issue is known as right issue. Under the right issue, shares are offered by the company to its existing shareholders at a price which is less than its market price.
(iv) Preferential issue: This method enables a company to make preferential allotment of its shares to its promoters at a price unrelated to the current market price. Such shares may be issued subject to a lock-in period i.e. they can’t be sold in the market before the expiry of a stipulated period.
(v) Private placement: Under this method, a company sells its securities privately to investors such as financial institutions,financiers, brokers etc. This method saves the costs of public issues
45. “SEBI is the regulator of the Indian Capital Market.” Comment.
Ans: The capital market has witnessed a tremendous growth during 1980s, characterised particularly by the increasing participation of the public. This ever expanding investors population and market capitalisation led to a variety of malpractices on the part of companies, brokers, merchant bankers etc. The gloring examples. of these malpractices include existence of self-styled merchant bankers unofficial private placements, delay in delivery of shares etc. These malpractices and unfair trading practices have eroded investor confidence and multiplied investor grievances. The government and stock exchange were rather helpless in redressing the investor’s problems because of lack of proper penal provisions in the existing legislation. In view of the above, the Government of India decided to set-up a separate regulatory body known as Securities and Exchange Board of India (SEBI).
46. Discuss the procedure of purchase and sale of securities in a stock exchange.
Ans: The procedure of purchase and sale of securities in a stock exchange involves the following steps :
(i) Selection of Broker: A person intending to buy or sell securities must select a broker who is a member of the stock exchange. The securities can be bought and sold only through professional brokers only.
(ii) Placing the order: After making the choice of a broker, a person will engage him for buying and selling certain securities. Before placing an order he can consult his friends and the broker. The order can be communicated to the broker either personally or through telephone, e-mail, online etc.
(iii) Executing the order: After receiving the order, the broker will contact other brokers of the stock exchange and will give and receive offers to execute the order of his clients. When the deal is over, a copy of the contract note is sent to the client. The contract note contains the name and price of securities, name of parties, brokerage charged and is signed by the broker.
(iv) Settlement: This is the last stage in trading of securities done by the brokers on behalf of their clients. The mode of settlement depends upon the nature of the contract. All the transactions of the stock exchange may be classified into two categories, namely (a) spot or ready delivery contracts and (b) forward delivery contracts.
F. LONG TYPE QUESTIONS ANSWERS TYPE – II (6/8 MARKS EACH)
47. “SEBI is the regulator of the Indian Capital Market.” Comment.
Ans: The ‘SEBI’ short for Securities and Exchange Board of India is often in the news because of its supervisory and regulatory role over the functioning of stock exchanges spread throughout the country. The SEBI has been set up as a statutory body under the SEBI Act, 1992 with a view.
(i) to protect the interests of the investors in securities.
(ii) to promote the development of the securities market. and
(iii) to regulate the functioning of the securities market.
In this section, we shall study the functions and role of SEBI in the economy of our country.The number of investors in securities in the country increased considerably during the 1980s. At the same time, several unfair practices were observed on the part of companies, brokers, merchant bankers, investment advisers etc. In order to protect the interests of investors, the Central Government constitutes the Securities and Exchange Board of India (SEBI) in April 1988 under the administrative control of the Finance Ministry. Later, it became a statutory body having perpetual succession and a common seal under the Securities and Exchange Board of India Act, 1992.
48. Explain in brief the following money market instruments:
(a) Treasury Bill.
(b) Commercial Paper.
(c)Certificate of Deposit.
Ans: (a) Treasury Bill: Treasury bills are issued by the Reserve Bank of India on behalf of the central Government to meet its short-term financial needs. The maturity period of T-Bills may be 14 days, 91 days, 182 days or 364 days. These bills are generally purchased by the commercial banks, non-banking financial institutions, insurance companies etc. Treasury bills are highly liquid in nature because the RBI is ever ready to purchase them on discount.
(b) Commercial Paper (CP): A commercial paper is a short-term promissory note issued by reputed company to meet its working capital requirements. The maturity of such papers may very from 15 days to 12 months. These instruments are generally purchased by commercial banks, insurance companies and Unit Trust. Commercial papers are not backed by any security, so they can be issued by credit worthy companies only.
(c) Certificates of Deposit (CD): A CD represents a time (or fixed) deposit raised by a commercial bank. In other words, it is a document of title to the time deposit. It is issued bank against deposits given by a company. It can be issued for a period ranging from 3 months to 12 months. It is a transferable instrument and can be sold to any business firm. Banks are not allowed to discount the CD.
49. Describe the functions of stock exchange.
Ans: The functions performed by a stock exchange are described below:
(i) Providing Liquidity to Securities: Stock exchange provides a ready market for the securities issued by various institutions. The investors can convert their money into securities and vice versa very quickly.
(ii) Mobilisation of Savings: Stock exchange helps in mobilisation of surplus funds of individuals, business firms and cooperatives for investment in popular securities. The stock brokers are always ready to help their client with their specialised services.
(iii) Pricing of Securities: Stock exchange helps in determining the price of various securities. The forces of demand and supply act freely in the stock exchange. The stock exchange helps the investors to know current market prices of various schemes.
(iv) Capital Formation: Stock exchange not only mobilises the existing savings but also induces the public to save money. It provides avenue for investment in various securities which yield higher return. This
facilitates capital formation in the country.
(v) Control of Corporate Sector: Every company which wants its shares to be dealt in at the stock exchange has to follow the rules framed by the stock exchange in this regard.
50. Write the functions of New Issue Market.
Ans: The functions of New Issue Market or primary market are given below:
(i) It channalises saving for long-term investments.
(ii) The savings are allocated to different sectors.
(iii) It deals with new issues of securities.
(iv) It acts as a link between those who have surplus money and those who want to utilise it for productive uses.
(v) The savings are used for economic development of the country.
(vi) It deals with long term instruments of equity and debt.
(vii) The pattern of long-term investment is determined by primary market.
(viii) It uses the services of a number of intermediaries for procuring savings.
51. Distinguish between National Stock Exchange of India (NSEI) and Over the Counter Exchange of India (OTCEI) on the following bases:
(a) Year of establishment.
(b) Paid up capital.
(c) Securities traded.
(d) Objective.
Ans: The distinction between National Stock Exchange of India (NSEI) and Over the Customer Exchange of India (OTCEI) are listed below :
| Basis | NSEI | OTCEI |
| 1. Year of Establish ment | It was established in 1992 | It was established in 1990 |
| 2. Paid up capital | Paid up capital of Rs. 3 crore and above | Paid up capital of 30 lakhs and above. |
| 3. Securities traded | Capital market as well as money market se curities are traded such as equity shares, deben- tures, bonds etc. | Only capital market securities are traded such as equity shares. debentures, bonds etc. |
| 4. Objective | A nationwide, ringless, transparent market for capital as well as capital market. | A nationwide transparent exchange for trading in the securities of small companies. |
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