Class 12 Finance Chapter 3 Capital Market

Class 12 Finance Chapter 3 Capital Market Question answer to each chapter is provided in the list so that you can easily browse throughout different chapters SCERT Class 12 Finance Chapter 3 Capital Market and select need one.

Class 12 Finance Chapter 3 Capital Market

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Also, you can read the SCERT book online in these sections Solutions by Expert Teachers as per SCERT (CBSE) Book guidelines. Class 12 Banking Solutions These solutions are part of SCERT All Subject Solutions. Here we have given Assam Board/NCERT Class 12 Finance Chapter 3 Capital Market Solutions for All Subject, You can practice these here.

Capital Market

Chapter: 3

1. Name the Institutions operating in the capital market.

Ans: Important Institutions of the Capital Market are:

Stock Exchanges, All India Level Financial and state Level Financial Institutions such as IDBI, IFCI, ICICI, SFC etc.

2. Capital Market is the market for long term funds (state whether True or False)

Ans: True.

3. What is Portfolio?

Ans: A collection of investments owned by the investor is called portfolio. An investor may have just one stock or multiple securities in a portfolio. It contains a diverse range of financial instruments like shares, bonds, futures, options, etc.

4. What is Derivative?

Ans: A derivative is a financial instrument that derives its value from the underlying asset or group of assets. Futures and options are examples of derivatives. Usually, underlying assets are market indexes, shares, commodities, currencies.

5. What is Sensex?

Ans: One of the most popularly used terms in the stock market, Sensex was penned down by market expert Deepak Mohoni. Sensex meaning is a combination of two words-sensitive and index. Sensex India comprises 30 of the largest and most-traded stocks on the BSE, compiling stocks from some of the largest companies in the country. The BSE Sensex is the pulse of the Indian stock market and was first published on 1st January 1986.

6. What is Nifty or Nifty 50?

Ans: Nifty 50 is a basket or collection of the 50 largest most active stocks listed on NSE. It helps investors gauge the overall market sentiments. The term Nifty 50 is a combination of National Stock Exchange and Fifty (50).

7. What is Demat Account?

Ans: Demat or Demat Account is an electronic account which holds financial assets like shares, mutual funds, ETFs, bonds, sovereign gold bonds, ULIPS etc. in digital form. A demat account is opened with a broker like Samco Securities, which is India’s best stockbroker.

8. What is Beta?

Ans: Beta measures the volatility in the prices of the stock as compared to the overall movement of the market. If the stock has a beta value of 2 it means for every 1 point change in the entire market, the prices of the stock change by 2 points. So if the stock market declines by 1 point, the price of the stock will decrease by 2 points and vice-versa. The beta is an important measurement to gauge the risk a stock is adding to a portfolio. High beta stocks are risky as they are more volatile to the swings of the market; however, there is a higher return potential. Similarly, low beta stock presents a lower risk but correspondingly lower returns as well.

9. What is New Issue Market?

Ans: The New Issue Market is also called Primary Market, where new securities i.e., shares and bonds that have never been previously issued are offered. It is a market for fresh capital. Both new companies and the existing companies can raise capital on the new issue market. The main function of the new issue market is to facilitate the transfer of funds from willing investors to the entrepreneurs. It also helps corporate enterprises in securing their funds. The New Issue Market channelises the savings of individuals and others into investments.

10. What is Trade Settlement?

Ans: In a secondary market, the trading and settlement procedure begins with the choosing of a broker or sub-broker and finishes with the settlement of shares. To trade on the secondary market, you must first open a Demat account with a broker or bank. You can buy and sell securities after your account is operational. Your deal is settled once your order is executed and you receive a contract note.

1. What is Alpha?

Ans: Alpha is the relative return on investment as compared to the overall market, or the benchmark index. Alpha shows how well or poorly a stock has performed in comparison to the overall market. Sometimes, a stock may provide a nominal rate of return such as 5% but that 5% would be the result of the general movement in the market and not an actual barometer of the performance of an investment. Hence, Alpha is a precise measurement of performance of a stock independent of the market movements. Alpha tracks the historical active return of an investment. Therefore an Alpha of 10% means that the investment outperforms the overall market by 10%. Similarly, -10% means that investment underperforms the overall market by 10%.

2. What is Call Option?

Ans: A call option gives the buyer the right but not the obligation to buy an underlying asset at the strike price on or before the expiry date. The buyer of a call option speculates that the market is bullish, and the prices of the underlying asset will increase. If at the expiry date, the price of the underlying asset is below the strike price, the buyer refuses to exercise his right. His loss is limited to the premium paid. If the price of the underlying asset is above the strike price, the profit is the current stock price minus the strike price, multiplied by the lot size, with the premium deducted as a cost of the call option.

3. What is Futures?

Ans: Futures are financial contracts to buy or sell an asset at an agreed upon future date at a predetermined price. They are often used to protect against price fluctuation of the underlying asset or help prevent or minimise losses from unfavourable price movements. It can also be used as a leveraged to speculate on the price movement of the underlying asset and profiteer from it. Futures contract are traded ir lot sizes having different expiry dates and set prices that are known to the investor at the time of the contract itself. There are many types of futures contracts, such as commodity futures, stock futures, currency futures, etc.

4. What is Options?

Ans: Options are financial contracts that provide the buyer the right but not the obligation to buy or sell the underlying asset at a predetermined price on or before the maturity date. Options are traded in lots. The specified price is known as the strike price. The amount paid in exchange for acquiring the right to buy or sell the underlying asset is known as option premium. In case the buyer does not exercise this right, his loss is limited to the option premium, he has paid. In case of the seller, the potential losses that can be incurred by him are limitless; however, the profit is limited to the option premium paid by the buyer in case the buyer refuses to exercise his right. There are two types of options: Call options and Put options.

5. What is Online Trading?

Ans: Before the era of online trading, traders had to call and give ‘buy’ and ‘sell’ order to their brokerage firms to trade for them. It used to be a very tedious process, and understandably caused many problems. Surprisingly, there are a few investors who still practice off-line trading even today. However, with the advent of the internet in this digital era, the vast majority of traders have moved to online trading platforms. You can place ‘buy’ and ‘sell’ orders, place market limits, put a stop-loss, check the status of an order, read news about companies, view the list of securities currently held through the dashboard, etc. and you also have access to all your previous investment statements. Online trading has also reduced costs for both traders and investors.

6. What is Minimum Public Offer?

Ans: A company which desires to list its securities in a stock exchange, should offer at least sixty percent of its issued capital for public subscription. Out of this sixty percent, a maximum of eleven percent in the aggregate may be reserved for the Central government, State government, their investment agencies and public financial institutions. The public offer should be made through a prospectus and through newspaper advertisements. The promoters might choose to take up the remaining forty percent for themselves, or allot a part of it to their associates.

7. What is Fair allotment?

Ans: Allotment of shares should be made in a fair and transparent manner. In case of over subscription, allotment should be made in an equitable manner in consultation with the stock exchange where the shares are proposed to be listed. In case, the company proposes to list its shares in more than one exchange, the basis of allotment should be decided in consultation with the stock exchange which is located in the place in which the company’s registered office is located.

8. Who is a Stockbroker?

Ans: A stockbroker can be a person or an entity that has the authority to purchase and sell securities on the recognized stock exchanges on behalf of the investors and traders. For this, the person or the entity has to first become a member of the recognized stock exchange after following the process and paying the requisite fees. A person can also become a broker by working in a brokerage firm and acting on behalf of the trading member as their agent or otherwise.

9. What are Stock Market Indices?

Ans: A stock market index abbreviated as a stock index is an indicator that shows all the major changes in India’s stock market. The same stocks are selected from amongst the securities already grouped and listed on the stock exchange to develop an index. However, the selection criteria are based upon the type of industry, the company’s size, and its market capitalization. This indicator is used to minimize the mess up and indicate the proper position of the market. Changes in the price of underlying assets impact the overall value of the index. If the price goes upwards, the stock index will rise, and if they go downwards, the stock will fall.

10. What do you mean by Capital Market?

Ans: The Capital Market refers to that part of the financial market which eals in lending and borrowing of medium and long-term funds. It is market in which medium and long-term securities, with a maturity of one year or more are exchanged.

The Capital Market consists of a series of channels through which the savings of the community are made available for industrial and commercial enterprises and public authorities. The capital market is a concerned with those private savings, individual as well as corporate, that are turned into investment through new capital and also new public loans floated by government and semi-government bodies.

11. What are the institutions or intermediaries of Capital Market?

Ans: The institutions or intermediaries of Capital Market are:

(i) Development Banks.

(ii) Specialised Financial Institutions.

(iii) Investment Institutions.

(iv) Non-Banking Financial Companies, e.g.. mutual funds, merchant bankers etc.

12. What are the sub-markets/components of capital market? 

Ans: Following are the three components of Capital Market:

(i) New Issue Market/ Primary Market.

(ii) Stock Market/ Secondary Market.

(iii) Financial Institutions.

13. Mention the main functions of New Issue Market.

Ans: The main functions of New Issue Market are:

(i) Originations.

(ii) Underwriting.

(iii) Distribution.

14. What are the instruments that are traded in the capital market?

Ans: The main instruments traded in the capital market are: 

(i) Stocks.

(ii) Shares.

(iii) Debentures.

(iv) Bonds.

(v) Securities of the Government.

(vi) Global Depository Receipts (GDR).

15. What are the instruments of capital market?

Ans: The instruments of capital market are:

(i) Shares.

(ii) Debentures/ Bonds.

(iii) Forwards.

(iv) Futures.

(v) Options.

(vi) Global Depository Receipts (GDR).

16. What do you mean by Primary Market?

Ans: The primary market also know as New Issue Market where new and fresh securities i.e. shares and bonds that have never been previously issued are offered. Both new companies and the existing companies can raise capital on the new issue market. The main function of the new issue market is to facilitate the transfer of funds from willing investor to the entrepreneurs, Besides, helps corporate enterprises in securing their funds, the new issue market channelises the savings of individuals and others into investments.

17. Name the intermediaries operating in the primary market.

Ans: Name the intermediaries operating in the primary market are:

(i) Merchant Bankers.

(ii) Underwriters.

(iii) Brokers.

(iv) Registrars to issue and share transfer agents.

(v) Debenture trustees.

(vi) Portfolio Managers.

18. Define a Stock Exchange.

Ans: Stock market represents the secondary market where existing securities (shares and debentures) are traded. Stock exchange provides a mechanism for purchase and sale of existing securities.

Stock exchanges are organised and regulated markets for various securities issued by corporate sector and other institutions.

Securities contract (Regulation) At, 1956, “Stock Exchange means any body individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling in securities.”.

1. What is Capital Market? What are the features of Capital Market?

Ans: The market for long-term fund is known as capital market. It covers all the facilities and institutional arrangement for lending and borrowing medium and long-term funds.

The features/characteristics of capital market are:

(i) The link between investors and borrowers: The capital market links investors with the borrowers of funds. It routes money from savers to entrepreneurial borrowers.

(ii) Deals in medium and Long-term investment: In the capital market, medium and long-term financial instruments are traded. Through this market, corporates, industrial organisations, financial institutions access long-term funds from both, domestic as well as foreign markets.

(iii) Presence of Intermediaries: Capital market operates with the help of intermediaries. The intermediaries like brokers, underwriters, merchant bankers, collection bankers, etc. play an important role in the capital market.

(iv) Promotes capital formation: Capital market provides a platform for investors and borrowers of long-term funds to engage in trade. This leads to capital formation in the economy as it mobilises funds.

(v) Regulated by government rules, regulations, and policies: Capital market operates freely. However, it is regulated by government rules, regulations, and policies. E.g. SEBI is the regulator of Capital markets.

(vi) Deals in marketable and non-marketable securities: It trades in both, marketable and non-marketable securities. Marketable securities are securities that can be transferred. E.g.: shares, debentures, etc. Non- marketable securities are those which cannot be transferred. E.g.: term deposits, loans, and advances.

(vii) Variety of Investors: It has a wide variety of investors including both, individuals (i.e. general public) and institutional investors like mutual funds, insurance companies, financial institutions, etc.

(viii) Risk: Risk is very high as the instruments have long maturity periods. But along with that, the return on investments is also very high.

2. Explain the functions of capital market.

Ans: The importance of capital market can be justified on the following grounds:

(i) Availability of Funds: Capital Market helps to raise long term funds from domestic and foreign investors.

(ii) Mobilisation of Savings: Capital Market mobilises the idle savings of individuals and institutions to productive channels.

(iii) Capital Formation: Capital Market stimulates savings and investment in the economy and improves utilisation of financial resources. In this way, it leads to capital formation.

(iv) Industrial Growth: Capital market facilitates industrial growth in the economy by making capital available for investment. It generates long term funds, which are essential for the establishment and operation of industries.

(v) Balance Between Demand and Supply: Capital market bring about a balance between demand and supply of capital. It serves as a link between those who demand capital and those who supply capital.

(vi) Liquidity: Capital market enables investors to sell their securities through the stock exchanges. In other words, capital market ensures liquidity.

(vii) Attracting Foreign Capital: Capital market helps in attracting foreign investment. The Indian capital market provides the channels through which foreign investors and non-resident Indians can invest their funds in the securities of Indian companies.

3. Explain the importance of capital market.

Or

“Capital Market serves as an important link between those who save and those who aspire to invest their savings,” Explain.

Ans: The importance of capital market can be briefly summarised as follows:

(i) The capital market serves as an important source for the productive use of the economy’s savings. It mobilies the savings of the people for further investment and thus, avoids their wastage in unproductive use.

(ii) It provides incentives to savings and facilitates capital formation by offering suitable rates of interest as the price of capital.

(iii) It provides an avenue for investors, particularly the household sector to invest in financial assets which are more productive than physical assets.

(iv) It facilitates increase in production and productivity in the economy and thus enhances the economic welfare of the society. Thus it facilitates “the movement of stream of command over capital to the point of highest yield” towards those who can apply them productively and profitably to enhance the national income in the aggregate.

(v) The operations of different institutions in the capital market induce economic growth. They give quantitative and qualitative directions to the flow of funds and bring about rational allocation of scarce resources.

(vi) A healthy capital market consisting of expert intermediaries promotes stability in values of securities representing capital funds.

(vii) Moreover, it serves as an important source for technological upgradation in the industrial sector by utilising the funds invested by the public.

Thus, a capital market serves as an important link between those who save and those who aspire to invest their savings.

4. Discuss about the nature of Capital market.

Ans: The nature of capital market may be explained as follows:

(i) Capital Market helps the movements of public savings into productive investments. Such movements result in capital formation and economic growth of a country.

(ii) Capital market offers incentives for savings in the form of suitable rate of interests and dividends.

(iii) Capital market consists of expert intermediaries and institutes. These experts can promote stability in the values of securities representing capital funds.

(iv) The capital market does not provide a single rate of interest or dividend on investment, rather there is complex pattern or structure of rate of interest.

(v) Capital market deals in only long and medium term funds like shares, debentures etc.

(vi) There are international dealings in finances, the nature volume of such dealings is often, quite restricted depending on the economic and foreign policies of various nations governments.

5. What are the components of Capital Market? Describe them.

Ans: Following are the three components of a capital market:

(i) New Issue Market.

(ii) Stock Market.

(iii) Financial Institutions.

(i) New Issue Market: The primary market also know as New Issue Market where new and fresh securities i.e. shares and bonds that have never been previously issued are offered. Both new companies and the existing companies can raise capital on the new issue market. The main function of the new issue market is to facilitate the transfer of funds from willing investor to the entrepreneurs, Besides, helps corporate enterprises in securing their funds, the new issue market channelises the savings of individuals and others into investments.

(ii) Stock Market: Secondary Market or Stock Market is a highly organised financial market, where second hand securities i.e. shares and debentures can be bought and sold. Its main function is to create a link between the buyers and sellers of securities so that investments can change hands in the quickest, cheapest and fairest manner.

Under the Securities Contract (Regulation) Act, 1956, the term stock exchange has been defined as, an association, organisation, or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.”

(iii) Financial Institutions: Financial institutions are the most active constituent of the capital market. Financial institutions are those institutions engaged in the promotion, development of industry and other key sectors. Financial institutions provide medium and long-term loans on easy installments to big business houses. Financial institutions are also called development banks because they provide not only finance but also help in promotion of new enterprises.

6. Discuss the various methods of issuing of securities in the New Issue or Primary Market.

Ans: The commonly used methods of issuing securities the primary market are:

(i) Public Issue Method.

(ii) Book Building Method.

(iii) Offer For Sale.

(iv) Placement Method.

(v) Rights Issue.

(i) Public Issue Method: Public Issue refers to the issue of new securities to the public. This is the most common method of issuing securities by corporate bodies. Under this method, the issuing company by mens of a prospectus directly offers to the general public a fixed number of securities at a fixed price either at par or premium. The prospectus must disclose full and correct particulars and must contain the information as required by the statute. (Companies Act).

(ii) Book-Building Method: Book Building is a new method of issue of securities in free pricing era. In a free pricing regime unrealistic and abrupt pricing structure more often than not strips the efficiency of the capital market. In such a situation, book building has become an effective alternative. Book-building means a process by which a demand for the securities proposed to be issued is elicited by the company and built up and an often price based on the investor’s demand is determined. The whole process is undertaken by the issue of a notice or circular or advertisement or information memoranda.

A company may issue its securities through book building in the following manners:

(a) 100 percent book building. or

(b) 75 percent book-building.

A 100 percent book-building issue implies that the entire issue is completed in a single stage. In this case, the entire issue has to be underwritten and the securities has to be allotted in demand form. In the 75 percent book-building.

The issue can be two categories:

(a) The placement portion, where the issue is made to the public through underwriter, merchant bankers, brokers.

(b) The public portion, where the often is made to the public directly.

(iii) Offer for sale: The method of issuing securities to the intermediaries at a specified price is known as offer for sale. This method consists of two stages. In the first stage the issuing company sells the securities to the intermediaries at an agreed price. In the second stage, the intermediaries resell the securities to the ultimate investors at a higher price. The intermediaries may be merchant bankers, promoters or sponsors issue houses, investment banks or firms of stock brokers.

The issuing company has to enter into an agreement with the intermediary specifying the terms and conditions of the issue. The agreement has to be registered with the concerned stock exchange.

(iv) Placement Method: Under this method a company sells its securities to an issue house. The issue house subsequently offers the securities to its clients both individual and institutional investors. The issue house usually place the securities at a higher price than the price at which they acquired the securities. The difference is their remuneration.

Placing of securities may unquoted or quoted. The former is known as private placing and the latter is known as stock exchange placing.

(v) Rights Issue: Means the issue of shares by an existing company to its existing shareholders. Under this method the existing shareholders are offered the right to subscribe to the new issue of shares by the company in proportion to the member of shares they already hold. The offer is made by the company by sending a letter of offer to the shareholders of the company on the date of the offer.

In shareholders may accept whole of the shares offered accept a part of the offer and renounce the rest or renounce the whole of the offer. In case, the shares are not taken up by the shareholders the company may dispose off the shares in the market in the most beneficial way.

7. Explain about the recent development in primary market in India.

Ans: A number of developments have taken place in the Indian capital Market with the launching of financial reforms since July 1991. In the process, the capital market is being rebuilt. Some of the important developments that have taken place, in the Indian capital market, during last ten years.

July 1991:

(i) The new Industrial policy announced by the Government.

Year 1992:

(ii) Ordinance promulgated according to statutory powers to the securities and Exchange Board of India (SEBI) as a regulatory authority over various constituents of the capital market.

(iii) CCI abolished and free pricing introduced.

(iv) Over the Counter Exchange of India begins operations as a second tier bourse permitting smaller companies to raise funds.

(v) Insider trading made an offence.

Year 1993:

(vi) A number of private sector mutual funds launched schemes to mobilize funds for investment.

(vii) Increase in minimum number of share applications and proportionate basis of allotment introduced.

(viii) Capital adequacy norms for brokers announced.

(ix) Ordinance to amend FERA promulgated on January 8, 1993.

(x) Foreign Institutional Investors (Flls) registered by SEBI.

Year 1994:

(xi) National Stock Exchange (NSE) begins on time scripless trading in India.

(xii) Private placement of Issue with FIls begins.

These developments have given rise to a humbler of new financial intermediaries in the Indian capital markets.

The important ones include:

(i) Merchant Banking.

(ii) Mutual Funds.

(iii) Leasing and hire purchase companies.

(iv) Venture capital companies.

Since August 1990, merchant bankers engaged in issue management corporate advisory services, under writing and portfolio management have to obtain authorization from the securities and Exchange Board of India (SEBI) after meeting the requirements of capital adequacy norms. In 1993 there were 568 merchant banker in out country out of which 312 were authorized by the securities and exchange board of India. The number of registered merchant bankers with SEBI increased to 422 at the end of August 1994.

On 1ˢᵗ march 1993 new policy guidelines have been issued by SEBI for the merchant bankers to ensure greater transparency in that operations and to make them ascertainable so as to protect the investor’s interest. The guidelines relate to preissue obligation, under writing, advertisement and post issue obligations of the merchant bankers.

8. Distinguish between Primary Market and Secondary Market.

Ans: Distinction between primary and secondary market:

9. What are the similarities between New Issue Market and the Stock Exchanges?

Ans: The New Issue Market and the stock Exchanges are inseparably connected.

The similarities between the two are as follows:

(i) Stock Exchange Listing: One aspect of this inseparable between there is that the securities issued in the NIM are invariably listed on a recognised stock exchange for dealings in them. The practice of listing of new securities on the stock market is of immense utility to the potential investors who can be sure that should they receive allotment of new issues, they will subsequently be able to dispose them off any time. The absence of such facilities would act as some sort of psychological barrier to investments in New securities and, thus, widen the initial/primary market for them.

(ii) Control: The stock exchanges exercise considerable control over the organisation of new issues. In terms of regulatory framework related to dealings in securities, the new issues of securities which seek stock quotation/listing have to comply with statutory rules as well as regulations framed by the stock exchanges with the object of ensuring fair dealings in them. If the new issues do not conform to the prescribed stipulations, the stock exchanges would obviously enables the stock exchange to exercise considerable control over the new issues market and is indicative of close relationship between the two.

(iii) Economic Interdependence: The markets for new and old securities are, economically, an integral part of single market the industrial securities market. Their mutual interdependence from the economic point of view has two dimensions. One, the behaviour of the stock exchanges has a significant bearing on the level of activity in the New Issue Market and therefore, its responses to capital issues: Activity in the new issues market and the movement in the prices of stock exchange securities are broadly related : New issues increase when share values are rising and vice versa.

The second dimension of the mutual interdependence of the two part of the market is that the market represents an important case where the stock-demand and supply curves, as distinguished from flow-demand-and-supply curves exert a dominant influence on price determination. Thus, the flow of new savings into new securities is profoundly influenced by the conditions prevailing in the old securities market-the stock exchange.

10. Discuss briefly the functions of New Issue or Primary Market.

Ans: The main function of New Issue Market is to facilitate the transfer of resources from savers to entrepreneurs seeking to establish new enterprise or to expand/ diversify existing ones. Such facilities are of crucial importance in the context of the dichotomy of funds available for capital uses from those in whose hands they accumulate, and those by whom they are applied to productive uses.

Some of the functions of the New Issue Market are briefly discussed below:

(i) Origination: The term origination refers to the work of investigation and analysis and processing of new proposals, these two functions are performed by the specialist agencies which act as the sponsors of issues in the process of origination the sponsoring institutions render, as a second function, some services of an advisory nature which go to improve the quality of capital issues.

Such services include advice or such aspects of capital issues as-

(a) determination of the class of security to be issued and the price of the issues in the light of market conditions.

(b) the timing and magnitude of issues.

(c) methods of flotation. and

(d) technique of selling, and soon.

(ii) Underwriting: To ensure success of and issues, therefore, the second specialist services under ringing provided by the institutional set up of the New Issue Market takes the form of a guarantee that the issues would be sold by eliminating the risk arising from uncertainty of public response.

(iii) Distribution: The success of an issue, in the ultimate analysis, depends on the issues being acquired by the investing public. The sale of securities to the ultimate investors is referred to as distribution. It is a specialist job which can best be performed by brokers and dealers in securities, who maintain regular and direct contact with the ultimate investors.

Thus, the new issue market is a complex of institutions through which funds can be obtained by those who require them from investors who have savings. The ability of the new issue market to cope with the growing requirements of the expanding corporate sector would depend on the presence of specialist agencies to perform the triple service function of origination and distribution.

11. What are the methods of issue of stock in a primary market? Discuss the functions of stock exchange.

Ans: The success of an issue depends, partly, on the issue mechanism.

The methods by which new issues are made are:

(i) Public issue through prospectus.

(ii) Lender/book building.

(iii) Offer for sale.

(iv) Placement. and

(v) Right issue.

(i) Public issue through prospectus: A common method followed by corporate enterprises to raise capital through the issue of securities is by means of a prospectus inviting subscription from the investing public. Under this method, the issuing companies themselves offer directly to the general public a fixed number of shares at a stated price, which in the case of new companies is invariably the face value of the securities, and in the case of existing companies, it may sometimes include a premier amount, if any. The public issue method through prospectus has the advantage that the transaction is carried on in the full light of publicity coupled with approach to the entire investing public.

(ii) Lender/ book building method: The essence of the lender/ book building method is that the pricing of the issues is left to the investors. The issuing company incorporates all the details of the issue proposed in the offer document on the lines of the public method including the reserve/ minimum price. The investors are required to quote the number of securities and the price at which they wish to acquire.

(iii) Offer for sale: Another method by which securities can be issued is by means of an offer for sale. Under this method, instead of the issuing company itself offering its shares directly to the public, it offers through the intermediary of issue houses/merchant bankers/investment banks or firms of stockbrokers. The securities are offered to the public at a price higher than the price at which they were acquired from the company. The difference between the sale and the purchase price, technically called as turn, represents the remuneration of the issuing houses.

(iv) Placement method: Under this method, securities are acquired by the issue houses, as in offer for sale method, but instead of being subsequently offered to the public, they are placed with the clients’ of the issue houses, both individual and are always prepared to subscribe to any securities which are issued in this manner.

Placing of securities that are unquoted is known as private placing. The securities are usually in small companies but these may occasionally be in large companies. When the securities to be placed are newly quoted, the method is officially known as stock exchange placing.

(v) Rights issue: In the case of companies whose shares are already listed and widely held, shares can be offered to the existing shareholders. This is called rights issue. Under this method, the existing shareholders are offered the right to subscribe to new shares in proportion to the number of shares they already hold. This offer is made by circular to ‘existing shareholders’ only.

Functions of stock exchange: The stock exchange plays an important role in the economic development of the country. The functions performed by the stock exchange are discussed as under:

(i) Ensure liquidity of capital: The stock exchanges provide a place where shares and stock are converted into cash. The exchanges provide a ready market where buyers and sellers are always available and those who are in need of hard cash can sell their holdings.

(ii) Continuous market for securities: The stock exchanges provide a ready market for securities. The securities once listed continue to be traded at the exchanges irrespective of the fact that owners go on changing.

(iii) Evaluation of securities: The investors can evaluate the worth of their holdings from the prices quoted at different exchanges for those securities. The securities are quoted under the free atmosphere of demand and supply and the prices are set on the basis of free market.

(iv) Mobilising surplus savings: The stock exchanges provide a ready market for various securities. The investors do not have any difficulty in investing their savings by purchasing shares, bonds etc. from the exchanges. If this facility is not there then many persons who want to invest their savings will not find avenues to do so.

(v) Helpful in raising new capital: The new and existing concerns need capital for their activities. The new concerns raise capital for the first time and existing units increase their capital for expansion and diversification purposes. The shares of new concerns are registered at stock exchanges and existing companies also sell their shares through brokers etc. at exchanges.

(vi) Safety in dealings: The dealings at stock exchanges are governed by well-defined rules and regulations of Securities Contract (Regulation) Act, 1956. There is no scope for manipulating transactions. The safety in dealings brings confidence in the needs of all concerned parties and helps in increasing various dealings.

(vii) Listing of securities: Only listed securities can be purchased at stock exchanges. Every company desirous of listing its securities will apply to the exchange authorities. The listing of securities gives privilege to the company.

(viii) Clearing house of business information: The companies listing securities with exchanges have to provide financial statements, annual reports and other reports to ensure maximum publicity of the corporations operations and working. The economic and other informations provided at stock exchanges help companies to decide their policies.

12. What is Secondary Market or Stock Exchange? 

Ans: Stock Market represents the Secondary Market where existing securities i.e. shares and debentures, are traded. Stock Exchanges provide an organised mechanism for purchase and sale of existing securities. Its main function is to create a link between the buyers and sellers of securities so that investments can change hands in the quickest, cheapest and fairest manner.

According to Securities Contract (Regulation) Act, 1956, the term stock exchange has been defined as, “an association, organisation or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.”

Thus, A stock Market is a market where dealings in the listed securities are made by the members of the exchange on their own behalf or on behalf of others.

13. Explain the functions of Stock Exchange. 

Ans: The important functions performed by a stock exchange are explained as follows:

(i) Ready Market and Liquidity: Stock exchange provides a ready and continuous market where investors can convert their money into securities and securities into money easily and quickly. It provides a convenient meeting place for buyers and sellers of securities. Regular dealings in securities ensure increased liquidity of the securities.

(ii) Evaluation of Securities: Stock exchange helps in determining the prices of various securities that reflect their real worth. It enables correct appraisal of securities. The forces of demand and supply act freely in the stock exchange and help in the valuation of securities. The prices at which transactions take place are recorded and made public in the form of market quotations to enable the investors to know current market prices of various securities.

(iii) Mobilisation of Savings: Stock exchange helps in mobilising surplus funds of individuals and institutions for investment in securities. In the absence of facilities for quick and profitable disposal of securities, such funds may remain idle.

(iv) Capital Formation: Stock exchanges 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 returns. I helps in the rational allocation of available funds and directs the flow of savings into the most productive channels. Thus, stock exchange facilitate capital formation in the country. 

(v) Protection of Investors: Stock exchanges ensure fair dealings and safety of funds. The members of the stock exchanges have to operate under certain rules and regulations which seek to check the exploitation of ignorant investors. In this way, stock exchange serves as the watch dog of the investors interests.

(vi) Encourages Industrialization: The stock exchange provides capital to industry and commerce. They provide finance to the Govt. But enhancing the investment opportunities available to finance production of goods and rendering of services, and promotes a desirable allocation of the funds among various industries.

(vii) Helps Government in the Policy Formulation: All the government policies have their clear reflection on the national science through stock exchange whether they are economic policies or monetary or fiscal. Hence, to accelerate the pace of industrialisation and economic development, the government can generate stability in its policies through their proper analysis and interpretation.

(viii) Economic Barometer: Stock exchange is a very sensitive barometer of business conditions in the country. Booms, depressions and other important events affects prices of securities. Price trends on the stock exchange reflect the economic climate in the country. One can easily analyse the causes of change in the business climate by the ups downs on the stock exchange.

14. State the features of Stock Exchange or Secondary market.

Ans: The important features of stock exchange are as follows:

(a) A market for securities: It is a wholesome market where securities of government, corporate companies, semi-government companies are bought and sold.

(b) Second-hand securities: It associates with bonds, shares that have already been announced by the company once previously.

(c) Regulate trade in securities: The exchange does not sell amd buy bonds and shares on its own account. The broker or exchange members do the trade on the company’s behalf.

(d) Dealings only in registered securities: Only listed securities recorded in the exchange office can be traded.

(e) Transaction: Only through authorised brokers and members the transaction for securities can be made.

(f) Recognition: It requires to be recognised by the central government.

(g) Measuring device: It develops and indicates the growth and security of a business in the index of a stock exchange.

(h) Operates as per rules: All the security dealings at the stock exchange are controlled by exchange rules and regulations and SEBI guidelines.

15. Write about the importance of capital market.

Ans: The capital market plays an important role immobilising saving and channel is in them into productive investments for the development of commerce and industry. As such, the capital market helps in capital formation and economic growth of the country. We discuss below the importance of capital market.

The capital market acts as an important link between savers and investors. The savers are lenders of funds while investors are borrowers of funds. The savers who do not spend all their income are called. “Surplus units” and the borrowers are known as “deficit units”. The capital market is the transmission mechanism between surplus units and deficit units. It is a conduit through which surplus units lend their surplus funds to deficit units. Funds flow into the capital market from individuals and financial intermediaries which are absorbed by commerce, industry and government. It thus facilitates the movement of stream of capital to be used more productively and profitability to increases the national income.

Surplus units buy securities with their surplus funds and deficit units sells securities to raise the funds they need. Funds flow from lenders to borrowers either directly or indirectly through financial institutions such as banks, unit trusts, mutual funds, etc. The borrowers issue primary securities which are purchased by lenders either directly or indirectly through financial institutions.

The capital market prides incentives to savers in the form of interest or dividend and transfers funds to investors. Thus it leads to capital formation. In fact, the capital market provides a market mechanism for those who have savings and to those who need funds for productive investments. It diverts resources from wasteful and unproductive channels such as gold, jewellery, real estate, conspicuous consumption, etc. to productive investments.

A well-developed capital market comprising expert banking and non- banking intermediaries brings stability in the value of stocks and securities. It does so by providing capital to the needy at reasonable interest rates and helps in minimising speculative activities.

The capital market encourages economic growth. The various institutions which operate in the capital market give quantities and qualitative direction to the flow of funds and bring rational allocation of resources. They do so by converting financial assets into productive physical assets. This leads to the development of commerce and industry through the private and public sector, thereby inducing economic growth.

In an underdeveloped country where capital is scarce, the absence of a developed capital market is a greater hindrance to capital formation and economic growth. Even though the people are poor, yet they do not have any inducements to save. Others who save, they invest their savings in wasteful and unproductive channels, such as gold, jewellery, real estate, conspicuous consumption, etc.

Such countries can induce people to save more by establishing banking and non-banking financial institutions for the existence of a developed capital market. Such a market can go a long way in providing a link between savers and investors, thereby leading to capital formation and economic growth.

16. Write about the Advantages & Disadvantages of capital market.

Ans: Advantages of capital market:

(a) Capital market improves transnational efficiency.

(b) Capital market helps to flow money in-between so many investors which means people who supply capital & people who borrow capital.

(c) Secondary capital market also helps to develop liquidity.

(d) Securities like bonds traded in the capital market provide more interest rates to investors than banks and shares offer dividends.

(e) Capital market helps increase your value of investment.

(f) Capital market’s Instruments comes with liquidity means you can easily convert it into cash.

(g) When an investor invests into the shares under the capital market, the investor will get ownership right of that particular share.

(h) Capital market also provides a wide range of investment types.

(i) By acquiring securities of the capital market provides surety while getting loans from banks or financial institutes.

(j) While investing in the capital market, investors will receive some sort of tax benefits.

(k) When an investor holds some securities from the capital market, provides them long-term performance and benefits.

Disadvantages of capital market:

(a) Capital market investment is very risky because of its very volatile at the time of price variations.

(b) As the capital market is very fluctuating in terms of price, investment won’t give you fixed income.

(c) As the capital market provides a wide range of investment which creates confusion for investors and makes it difficult to invest without professional advice.

(d) Purchasing and selling of capital market securities includes some brokerage fees or commissions etc. which eventually increases the cost of transactions.

17. Describe the Role of Capital Market in the Economy.

Ans: According to Dr. Mirza Azizul Islam (2006) capital market can play an essential role in enhancing economic development through efficient intermediation of savings into productive investments and in encouraging the expansion of private entrepreneurship (DSE, 2006). The primary market can contribute to the growth of private entrepreneurship by facilitating the entrepreneurs to raise funds from surplus savers and consequently finance investment in a cost-effective manner.

For instance, if an industrialist with a viable new investment or expansion proposal is unable to execute his plan due to financial crisis then he can issue securities to meet the required deficit. Moreover issuing shares have the additional advantage that they do not create fixed charges for the companies issuing them and hence endows a better option than, say, financing through bank loans. A proficient and vibrant secondary market can also contribute copiously to economic growth.

If a company, for instance, is well-managed and the secondary market prices are higher than face value, subsequent rights issue can obtain premium. Therefore the company can finance its development plan in  lucrative and cost-effective approach. So the capital market not only provides opportunity for companies to borrow funds needed for long term investment purposes but also provides avenue for the marketing of shares and other securities in order to raise fresh funds for expansion of operations, leading to increase in output or productivity.

The equity market offers opportunity for government to finance projects aimed at providing essential amenities for socio-economic development. Such market encourages inflow of foreign capital when foreign companies or investors invest in domestic securities. The securities market can help attain higher productivity by restructuring of ownership and management of the company as secondary market provides an exit option for the original founders and it also creates an avenue for the populace to participate in the corporate sector of the economy and share in its wealth through ownership of securities.

So it not only reduces the over-reliance of the corporate sector on short term finance for long term projects but truly makes available the needed money for venture capital development which could serve as a vehicle for industrial development. So through its allocating mechanism, the capital market ensures an efficient and effective distribution of scarce financial resources for the optimal benefit to the economy.

18. Who are the Intermediaries in New Issue Market or primary market?

Or

Who are the Parties Involved in New Issue Market or Primary Market?

Ans: Intermediaries in New Issue Market or primary market are:

(i) Merchant Bankers: in modern times, importance of merchant banker is very much, because it the key intermediary between the company and issue of capital. Main activities of the merchant bankers are determining the composition of the capital structure, drafting of prospectus and application forms, compliance with procedural formalities, appointment of registrars to deal with the share application and transfer, listing of securities, arrangement of underwriting/ sub-underwriting, placing of issues, selection of brokers, bankers to the issue, publicity and advertising agents, printers and so on. Due to overwhelming importance of merchant banker, it is now mandatory that merchant banker functioning as lead manager should manage all public issues. In case of rights issue not exceeding Rs.50 lakh, such appointments may not be necessary.

(ii) Underwriters: Another important intermediary in the new issue/ primary market is the underwriters to issue of capital who agree to take up securities which are not fully subscribed. They make a commitment to get the issue subscribed either by others or by themselves. Though underwriting is not mandatory after April 1995, its organization is an important element of primary market. Underwriters are appointed by the issuing companies in consultation with the lead managers/ merchant bankers to the issues.

(iii) Bankers to an Issue: The bankers to an issue are engaged in activities such as acceptance of applications along with application money from the investor in respect of capital and refund of application money.

(iv) Brokers to the Issue: Brokers are persons mainly concerned with the procurement of subscription to the issue from the prospective investors. The appointment of brokers is not compulsory and the companies are free to appoint any number of brokers. The managers to the issue and the official brokers organize the preliminary distribution of securities and procure direct subscription from as large or as wide a circle of investors as possible. A copy of the consent letter from all the brokers to the issue, should be filed with the prospectus to the ROC. The brokerage applicable to all types of public issue of industrial securities is fixed at.1.5%, whether the issue is underwritten or not. The listed companies are allowed to pay a brokerage on private placement of capital at a maximum rate of 0.5%. Brokerage is not allowed in respect of promoters’ quota including the amounts taken up by the directors, their friends and employees, and in respect of the rights issues taken by or renounced by the existing shareholders. Brokerage is not payable when the applications are made by the institutions/ bankers against their underwriting commitments or on the amounts devolving on them as underwriters consequent to the under subscription of the issues.

(v) Registrars to an Issue and Share Transfer Agents: The registrars to an issue, as an intermediary in the primary market, carry on activities such as collecting applications from the investors, keeping a proper record of applications and money received from the investors or paid to the sellers of securities and assisting companies in determining the basis of allotment of securities in consultation with the stock exchanges, finalizing the allotment of securities and processing/dispatching allotment letters, refund orders, certificates and other related documents in respect of the issue of capital. To carry on their business, the registrars must be registered with the SEBI.

(vi) Debenture Trustees: A debenture trustee is a trustee for a trust deed needed for securing any issue of debentures by a company. To act as a debenture trustee, a certificate from the SEBI is necessary. Only scheduled commercial banks, PFIS, Insurance companies and companies are entitled to act as a debenture trustees. The certificate of registration is granted to suitable applicants with adequate infrastructure, qualified manpower and requisite funds. Registration fee is Rs. 5 lakh and renewal fee is Rs. 2.5 lakh every three years.

(vii) Advertising agencies: Advertising plays a key role in promoting the public issue. The advertising agencies take the responsibility of giving publicity to the issue on the suitable media. The media may be newspapers/ magazines/ hoardings/ press release or a combination of all.

(viii) Financial Institutions: Financial institutions generally underwrite the issue and lend term loans to the companies. Hence, normally they go through the draft of the prospectus, study the proposed programs for the public issue and approve them. IDBI, IFCI and ICICI, LIC, GIC and UTI are some of the institutions that underwrite and give financial assistance.

19. What are the Advantages and disadvantages of primary market or the New issue market?

Ans: Advantages of primary market or the New issue market are:

(i) A Cost-Effective Way to Raise Capital: Companies can raise capital for their business cost-effectively and seamlessly in a primary market. Also, securities offered in the primary market can almost he instantly sold in the secondary market, thus providing high liquidity.

(ii) Less Chances of Price Manipulation: As compared to secondary market, there are less chances of price manipulation in the primary market. This leads to better transparency and operations.

(iii) Offers Diversification: Primary market serves as a potential avenue for diversification for investors, thus bringing down the quantum of risk. Investors can allocate their investments across asset classes in multiple financial instruments.

(iv) It provides opportunity for new investors to start new enterprises: Persons with technical know-how may resort to promote new ventures which are profit-oriented. The new issue market gives them an opportunity to materialize their ideas.

(v) Existing companies will be in a position to expand their activities: When the existing companies find their products obsolete, they would like to venture into new areas of production for which they require additional capital. The new issue market helps them raise the required funds.

Disadvantages of Primary Market:

(i) Limited Information Available to Investors: Often there may be limited information available to investors before they invest in an IPO. This is because unlisted companies are outside the purview of SEBI’s regulations.

(ii) No Historical Trading Data: As shares are issued for the first time, there’s no historical data available to analyse the IPO shares. This can make investment a little difficult. Also, if a share is oversubscribed, then small investors may not be able to receive their allocation.

(iii) A last word: When you invest in the stocks, keep an eye on the primary market too. This is because IPOs can have great potential to offer big returns to investors. No wonder there is a lot of excitement around each IPO announcement.

(iv) The major disadvantage is the owners reduce their share percentage to issue new stock in the market. The diluted shares may cause lower earnings per share.

(v) The issue of new shares gives rise to additional costs in the form of flotation costs which is usually higher than the cost of acquiring debt.

20. What are the Features of Primary Market?

Ans: Features of Primary Market are:

(a) New Issues: The fundamental feature of the primary market is that it is associated with new issues. That is why the primary market is called as the (NIM) new issue market.

(b) Place: Primary market is not a particular place but an activity of issuing, buying, and selling.

(c) Floating Capital: Primary market issues capital through public issue, offering for sale, private placement, and right issue. This is how the capital is raised for funding the companies and the government.

(d) It comes before the Secondary Market: All the transactions are primarily made in the primary market. Secondary market comes much later.

21. What are the types of Secondary markets?

Ans: Secondary markets are primarily of two types which are mentioned below:

(i) Over-The-Counter or OTC Market: These markets are a decentralized space where investors trade amongst themselves. In such markets, there is a very fierce competition to get higher volumes, which leads to a difference in prices from one seller to another. Compared with exchanges, the risk is higher as the seller and buyer deal on a one-to-one basis. The foreign exchange market is an example of OTC markets.

(ii) Stock Exchanges: In this type of secondary market, one will not find direct contact between the seller and the buyer of the security. To make trading safe and secure, heavy regulations are in place. Counterparty risk, in this case, is almost zero as the exchange is a guarantor. In Exchanges, there is a comparatively high transaction cost because of the exchange fees and commission.

22. What are the Advantages of Secondary Markets?

Ans: The benefits of secondary market trading are:

(i) It offers investors to make good gains in a shorter period.

(ii) The stock price in these markets helps in evaluating a company effectively.

(iii) For an investor, the ease of selling and buying in these markets ensures liquidity.

(iv) Trading in secondary markets does not require a hefty amount, thus facilitating investments of small ticket investors.

(v) Secondary markets help in analyzing the economic health of a company.

Disadvantages of Secondary Markets:

(i) Price fluctuations are very high in secondary markets, which can lead to a sudden loss.

(ii) Trading through secondary markets can be very time consuming as investors are required to complete some formalities.

(iii) Sometimes, government policies can also act as a hindrance in secondary markets.

(iv) Brokerage fees are high as every time an investor sells or buys shares, he/she needs to pay a brokerage commission.

23. What do you mean by Listing of securities? Also state its Objectives.

Ans: Listing means the admission of securities of a company to trading on a stock exchange. Listing is not compulsory under the Companies Act 2013/1956. It becomes necessary when a Public Limited Company wants to issue shares or debentures to the public. When securities are listed on a stock exchange, the company has to comply with the requirements of the exchange. The listing provides an exclusive privilege to securities on the stock exchange. Only listed shares are quoted on the stock exchange. Stock exchange provides transparency in transactions of listed securities and equality and competitive conditions. Listing is beneficial for the company, to the investor, and to the public at large.

The major objectives of listing are:

(a) To provide ready marketability and liquidity of a company’s securities.

(b) To provide free negotiability to stocks.

(c) To protect shareholders and investors interests.

(d) To provide a mechanism for effective control and supervision of trading.

24. Explain the procedure for a listing of securities on the Stock exchange.

Ans: There is a step-by-step procedure that is to be followed for a listing of securities in the stock market:

(i) Firstly, an application has to be submitted by the company to a recognized stock exchange. This procedure is provided vide section 73 of the Companies Act, 1956 whereby it is stated that if a public limited company wants to list its securities on the national stock exchange then it has to submit an application regarding the same with necessary documents to that stock exchange. The stock exchange can ask for any missing documents that are needed and the company has to submit them within ten working days.

(ii) Next, the stock exchange will inspect the financial status of the company and make sure everything is in line. If the stock exchange accepts the application of the listing company then the stock exchange and the listing company enter into an agreement.

(iii) The listing company has to accept all the terms and conditions and follow rules and regulations of the stock exchange under which is getting registered and also abide by the regulations of SEBI.

(iv) A company shall have to pay a fee for listing annually, which is calculated on the company’s paid-up capital.

(v) A company seeking admission to the stock exchange has to pay a security deposit which the stock exchange can confiscate if the company fails to pay dividends or delays in transferring securities, etc.

(vi) Finally, a company gets access to trade in the stock market after it fulfills all the formalities within the time prescribed under the SEBI Regulations, 2009.

25. What are the Conditions for Listing of Securities? Explain.

Ans: The general conditions for listing are given below:

(a) The Memorandum and Articles of Association of the applying, company must contain prescribed provisions, such as prescribing a common form of transfer, transferability of fully paid-up shares without any restrictions etc.

(b) The company must offer at least 60% of its issued capital for public subscription through a prospectus. (This provision aims to avoid concentration of economic power in the hands of a few through major shareholding).

(c) The prospectus must conform to certain given conditions like the opening of the subscription list and receipt of the share applications.

(d) The procedure followed for allotment should be fair and unconditional. If the issue is over subscribed, the basis of allotment should be decided by the company in consultation with the stock exchange in which the company has applied for enlistment.

(e) The company must execute a listing agreement. The listing agreement determines the nature of continued relationship between the company and the stock exchange. The company should make certain disclosures, file certain documents periodically and perform certain functions. These matters should be specified in the listing agreements.

(f) The company should give an undertaking, specifying that it shall not indulge in certain activities prohibited by law. Besides, the company should also declare that it would abide by the rules and regulations of the stock exchange.

In case the application for listing is rejected by the stock exchange, or the exchange failed to dispose of the application within the specified time, the company can appeal to the Central Government. The Central Government after hearing the company can set aside the decision of the stock exchange and order for enlistment or it can confirm the decision of the exchange. Now listing is made compulsory in case of certain companies.

26. What are the Types of Listing of Securities?

Ans: Types of Listing of Securities are:

(a) Initial listing: Here, the shares of the company are listed for the first time on a stock exchange.

(b) Listing for public Issue: When a company which has listed its shares on a stock exchange comes out with a public issue.

(c) Listing for Rights Issue: When the company which has already listed its shares in the stock exchange issues securities to the existing shareholders on rights basis.

(d) Listing of Bonus shares: When a listed company in a stock exchange is capitalizing its profit by issuing bonus shares to the existing shareholders.

(e) Listing for merger or amalgamation: When the amalgamated company issues new shares to the shareholders of amalgamated company, such shares are listed.

27. What are the Benefits of listing of securities?

Ans: Benefits of listing of securities are:

(i) First and foremost when a company gets registered on the stock exchange, its securities become tradeable.

(ii) The company has the chance of getting the best price from its securities as the market price on the stock exchange is regulated by the availability of buyers and sellers and the number of buyers and sellers there is huge.

(iii) Registering on the stock exchange gives the company great publicity as all information such as opening price, closing price, and other information are provided through almost every means of communication such as the internet, and newspapers, basically becoming public and providing more reach.

(iv) A proper timely report has to be maintained for a company to stay on the stock exchange. This helps in eradicating fraud and maintaining transparency in the operations of the company.

28. Explain the Types of Stockbrokers.

Ans: The following are the various types of stockbrokers:

(i) Full-service stockbrokers: Full-service stockbrokers offer a full stack of services to its clients. They are traditional brokers who provide a trading facility coupled with advisory services. For this reason, the fees charged by full-service stockbrokers are high, and the brokerage they charge is based on the total amount of trades that are executed by the client. Full-service brokerages are established players who have branches located all over the country. Clients can visit these branches for service and advice.

(ii) Discount Stockbroker: Discount stockbrokers provide financial products, access to mutual funds, banking products, and other services. A discount stockbroker offers many products and services that are similar to a full-service stockbroker, but with smaller commissions. Hence, swing traders and day traders who are more active may find discount stockbrokers appealing. Moreover, the platforms serve active day traders and investors; hence, they provide more research tools and trading options han full-service platforms.

(iii) Online Stockbroker: Also called a direct access stockbroker, an online stockbroker offers services to active day traders with the smallest commission – usually priced on a per-stock basis. Online stockbrokers offer direct access platforms with capabilities of routing and charting, and access to multiple exchanges, market makers, and electronic communication networks (ECN). Also, online stockbrokers offer the advantages of access and speed, allowing executions of orders on point- and-click. The platforms also enable the placing of complex options and stock orders. The access to heavy-duty platforms usually comes with a monthly fee consisting of software and exchange fees; however, the software fees can be discounted or waived depending on the actual number of shares traded monthly by the client.

29. Write about the Qualifications of a Stockbroker.

Ans: Qualifications of a Stockbroker:

(i) Education: An undergraduate degree in finance or business administration is required if a stockbroker seeks to work with an institutional client. Additionally, an understanding of accounting methods, financial forecasting and planning, and related laws and regulations is preferred.

(ii) Experience: A stockbroker can start working with a brokerage firm in any role, even as a college intern, and gain experience on the job. However, to be a stockbroker, he/she must show a strong understanding of accounting standards and regulations of the financial market.

(iii) Exams: A stockbroker must pass the General Securities Representative Exam, controlled by the Financial Industry Regulatory Authority (FINRA). A person needs to be financed by a member firm of FINRA or a Self-Regulatory Organization (SRO).

30. What are the Functions of the Stockbroker?

Ans: Functions of the Stockbroker:

(a) The selling stockbroker will use his best endeavours to sell the listed securities on the first trading day, following the receipt of instructions from his client.

(b) The selling stockbroker shall be responsible for ensuring that his client is the registered holder of the security. He must ascertain that there is enough available holdings to be sold, and that there is no charge registered against these holdings in the “Central Securities Depository”, or the “Register of Shares”. If it transpires that the holdings are not sufficient to meet the order, or that there is a charge against the holdings, the order will be rejected by BATS.

(c) The buying stockbroker shall use his best endeavours to buy the listed securities on the first trading day following the receipt of instructions from his clients.

(d) Both the selling and buying stockbrokers shall be responsible for supplying the Exchange with sufficient details of their clients, to enable the Exchange to produce the “Client Contract Notes” on behalf of the stock broking firms. This information must be supplied before the trade execution. In the event that sufficient details of the client are not available at the Exchange, the order will not be validated by BATS.

31. What are the Services Offered by Stock Brokers?

Ans: Stock brokers offer a gamut of services such as:

(i) Buying and Selling of Securities: One of the primary functions of a stock broker is to buy and sell securities on behalf of the clients based on the order placed by them through the broker’s terminal.

(ii) Advisory Services: Stock brokers are well-versed with the working of the stock market and possess expertise related to the performance of stocks, market trends and so on. Furthermore, they have access to valuable databases and research findings. This helps them offer outstanding investment advice to their clients.

(iii) Limited Banking Services: Stock brokers also provide limited banking services such as interest-bearing accounts, electronic deposits and withdrawals, etc.

(iv) Other Investments: Apart from securities, stock brokers also offer different investment products such as mutual funds, exchange-traded funds, bonds, commodity trading, futures, options, etc.

2. How to be a Stock Broker?

Ans: In order to apply for registration, a person has to meet the eligibility criteria laid out by the SEBI.

(i) Registration: The SEBI has introduced a common registration certificate for different market segments. Approval has to be obtained from the stock exchange and the clearing corporation. In order to register, the entity is required to apply via the regulator through the respective stock exchange in the manner prescribed. The entity would be issued a certificate bearing a unique registration number. The applicant has to meet the Fit and Proper” Criteria set by the SEBI.

(ii) Fees: Upon SEBI’s approval of the application, the Broker has to may membership fees to the exchange on which he intends to trade. Sub strokers also need to pay a similar amount.

(iii) Base Minimum Capital Deposit: Upon securing membership, base minimum capital deposit as prescribed has to be paid as security with the stock exchange. For stock brokers doing proprietary trading without algorithm, the deposit is Rs. 10 lakhs. For stock brokers trading without deposit is Rs. 25 lakhs. Lastly, for stock brokers doing algorithmic trading, algorithm, on behalf of clients, it is 15 lakhs. For those doing both, the the deposit is Rs. 50 lakhs. Those brokers not having nationwide presence, the deposit requirement would be 40%.

(iv) Test and Training: Upon submitting an application, one may have to secure certification from the National Institute of Securities Markets, created by the National Stock Exchange of India.

(v) Pursue additional certifications: While you can begin trading stocks on behalf of your clients as soon as you receive your COR from SEBI, some broking firms may require you to complete additional certification through the National Institute of Securities Markets (NISM). This program educates investors, sub-brokers, stockbrokers and other financial professionals about the stock market. You can register to take this exam online and review practice tests on NISM’s website to help you prepare.

33. Who is A Sub-Broker?

Ans: A sub-broker is an agent of a broker, i.e., he introduces new clients to the broker. A sub-broker gets a certain percentage of profit-sharing from the broker for introducing new clients. You can become a sub-broker by obtaining a certificate of registration from the SEBI. It is mandatory for the sub-broker to enter into an agreement with the broker as specified by SEBI. The sub-broker, the sub-broker is the broker’s agent who usually works with the client on their behalf. They are links between the broking firm and the client. The stockbroker usually gives the sub-broker different duties such as providing services and client management. They receive a commission or the fees or the charges for the services they provide by the stockbroker. The stockbroker can look for the vast network of operations in the country and use the link. The stockbroker connects with the different Sub-brokers and explores and points to the clients from other parts of the county. This is the complete information about the sub-broker working.

34. What are the Functions of Sub Brokers?

Ans: Following are some of the main function of sub-broker with a stockbroker:

(a) Assist Stockbroker: The major role of the sub-broker is to offer assistance to a stockbroker in making maximum deals. He helps him in getting a large number of clients who are willing to invest in the stock and securities offered by them.

(b) Prevents Delivery of Bad Documents: The sub-broker should not be involved in delivering the wrong or bad documents.

(c) Cooperate with Stockbroker to Protect Clients’ Interest: A sub-broker co-operate with his broker and keep a record of transactions. They work to protect the client’s interest concerning the dividends, bonus rights, shares and other things related to securities. Also, they should co- operate with other contracting parties to replace the documents that are marked as bad delivery.

(d) Work as an Agent of Principal Broker: A sub-broker must act on behalf of the principal broker to issue the clients’ purchase or sale notes. This helps the broker in getting detail of all the entered transactions on behalf of their client.

35. What is the difference between a broker and a sub-broker in the share market?

Ans: Difference between a broker and a sub-broker in the share market are:

(i) Function: A stockbroker functions independently, while a sub-broker acts as an intermediary between the main stockbroker and its clients. A sub-broker is primarily entrusted with the responsibility of expanding the business network of the original stockbroker. Stockbrokers usually also act as Depository Participants (DPs) of the National Stock Exchange’s (NSES) promoted National Securities Depositories Ltd. (NSDL) or the Bombay Stock Exchange’s (BSES)-promoted Central Depositories Securities Ltd. (CDSL). Here, you must remember that both depositories maintain stocks and securities in an electronic format. On the other hand, a sub-broker cannot be a DP.

(ii) Registration: A stockbroker has to be registered with SEBI. While initially, sub-brokers were also to be registered with the SEBI, the market regulator, since August 2018, has discontinued sub-broker as a category for registration. In its circular dated August 3, 2018, all existing sub-brokers had to migrate to the category of ‘Authorised Person compulsorily. According to the SEBI, an Authorised Person can be an individual, firm or other entity which is appointed by a stockbroker. These can provide access to a trading platform of a stock exchange by acting as an agent of the stockbroker.

(iii) Revenue Sharing: Sub-brokers have a wide range of responsibilities, thereby entitling them to a higher share of revenue generated via the clients. Though the main stockbroker gets a smaller share of the revenue, it has access to overall large revenue generated by scores of sub-brokers.

(iv) Brokerage: Stockbrokers charge direct brokerage fees from clients, while sub-brokers are not allowed to charge brokerage fees from clients directly. Sub-brokers receive the specified portion of the revenue from the stockbrokers.

(v) Importance: Stockbrokers play a vital role in the stock markets by ensuring sufficient availability of liquidity. They have a key place in the capital markets ecosystem. Sub-brokers, on the other hand, are vital for stockbrokers for the expansion of their businesses across regions. A stockbroker provides opportunities for new people to enter the financial market as agents by providing access to the stockbroking firm’s cutting edge trading tools and other services. Sub-brokers have to typically provide a deposit fee with the stockbroker.

36. Explain the Steps of Trading Procedure.

Ans: The steps involved in the methods of trading have been given below:

(i) Selecting a Broker: The stock market involves trading through only authorised brokers. These brokers can be individuals, companies, or even partnerships. To begin the trading process, one should select a registered broker.

(ii) Opening a Demat Account: Demat is short for dematerialised. The Demat account is opened with the help of depositories, which include brokers and banks. It is through this account that trading activities take place. This is an electronic system. The depository helps keep the investor or account holder informed about their transactions and the status of their investments.

(iii) Placing an Order: Once a Demat account is opened, investors can place orders in different ways, such as through brokers or themselves. The order comprises the buying and selling of shares in the stock market.

(iv) Execution of the Order: Once an order is placed, it is executed by the broker. Once executed, a contract note is issued, which informs the investor of all transaction details or orders, such as date, time, and amount.

(v) Settlement: This is the final step in the trading procedure. It involves the actual transfer of securities between the buyer and the seller. This also needs to be carried out by the broker. The two main kinds of settlement are On-the-spot settlement, where funds are immediately transferred and exchanged on the second working day of the transaction, and Forward settlement, which implies that the transfer or exchange will be carried out at some point in the future.

37. What are the types of stock market trading? Explain.

Ans: Primarily, there are five types of share trading.

These are:

(a) Day Trading: This form of trade involves purchasing and selling stocks in a single day. A single day in stock market terms means 9:15 am to 3:30 pm on a weekday (barring market holidays). In the case of day trading, individuals hold stocks for a few minutes or hours. A trader involved in such trade needs to close his/her transactions prior to the day’s market closure. It is popular for capitalizing on small-scale fluctuations in NAV of stocks.

(b) Scalping: It is also known as micro-trading. Scalping and day- trading are both subsets of intraday trading. Scalping involves reaping small profits repeatedly ranging from a dozen to a hundred profits in a single market day. However, every transaction does not yield profits, and in some cases a trader’s gross losses might exceed the gains. The holding period of securities, in this case, is shorter compared to day-trading, i.e. individuals hold stocks spanning a maximum of a few minutes.

(c) Swing Trading: This style of stock market trading is used to capitalise on the short-term stock trends and patterns. Swing trading is used to earn gains from stock within a few days of purchasing it; ideally one to seven days. Traders technically analyse the stocks to gauge the movement patterns they are following for proper execution of their investment objectives.

(d) Momentum Trading: In case of momentum trading, a trader exploits a stock’s momentum, i.e. a substantial value movement of stock, either upwards or downwards. A trader tries to capitalise on such momentum by identifying the stocks that are either breaking out or will break out. In case of upward momentum, the trader sells the stocks he/ she is holding, thus yielding higher than average returns. In case of downward movement, the trader purchases a considerable volume of stocks to sell when its price increases.

(e) Position Trading: Position traders hold securities for months aiming to capitalise on the long-term potential of stocks rather than short- term price movements. This style of trade is ideal for individuals who are not market professionals or regular participants of the market.

(f) Online Trading: In simple terms, it is the medium to execute the trading procedures. It includes several trading procedures like position, swing, day, and investment trading.

(g) Short-term Trading: This type of trading is valid from a day to a few weeks and produces significant outcomes.

(h) Medium Trading: This allows you to hold the stocks even for months and you can follow the trend of stop loss.

38. What are the Features of Online Trading?

Ans: Features of online trading are:

(i) Real time stock price and charts.

(ii) Real time order and trade execution.

(iii) Real Time Notification on screen.

(iv) Quick holing and position views.

(v) Every second profit and loss updation.

(vi) No laptop or computer required. Online trading can also be done from a mobile application.

(vii) Multiple Market Watch.

(viii) Real Time quotes and customization market data.

(ix) Stock Exchange and SEBI authorized online portals.

39. What are the Benefits of online trading? Explain.

Ans: Benefits of online trading:

(i) It eliminates the middleman: You can buy and sell without even speaking to your broker. This makes online trading alluring for someone who does not have the finances to work with full-service brokers.

(ii) Cheaper and faster: When a broker executes your trades, it costs you more money. On the other hand, when you trade online, a brokerage charge is levied but it is always less than what a traditional broker who has to place a trade physically, would charge you. Online trading is almost instantaneous.

(iii) It offers greater investor control: One of the most important advantages of online trading is that it gives you greater control over your investments. You can trade whenever you want with online trading during the trading hours and you can also take your own decision without any interference from the broker.

(iv) You can monitor your investments in real time: Your online trading platform has a lot of advanced tools and interfaces to monitor your investing performance and to do your own research. You can see real time gains or losses whenever you login from your phone or computer.

(v) Cost-Effective: Online trading is quite inexpensive as you pay less in brokerage and other charges, which is not the case with traditional investing. You can also opt for a broker like Stock, which offers zero brokerage plans, which will cut your brokerage costs to zero for life.

(vi) Flexibility: Traders can access their accounts from their mobile phones, laptops, and other devices. This allows them to keep tracking their investments from any location at any time. And in case your device is not working, you can easily shift to another medium without much hassle, unlike off-line trading.

40. What are the Disadvantages of Online Trading?

Ans: The coin has two sides. Just as there are advantages to online trading, there are also some disadvantages to online trading.

(a) Hidden Cost: Although the brokerage fee is lower, other facilities have to pay more. It seems like a lot of rounding up. Brokerage charges for online trading is very low but if you need call to broker for order placement they charges 2 or 3 times higher fees for that.

(b) Technical Knowledge: Since the trading terminal runs on a computer system, those who do not have knowledge of computer internet have to spend a lot of time learning it.

(c) System Error: Sometimes the website may run slow, the internet may not be up to speed, the computer may not respond, the server may go down, and the trading terminus may not be convenient to use. The mechanism or systems fails due to the less speed of internet connections, its cause huge loss in trading.

(d) No Control Over Decision: Greed, Fear and Patients are the main factors for stock market success. It is very difficult to control your emotions at the time of heavy market fluctuations.

(e) Limited Knowledge: Elimination of a broker could be mean trouble. Without proper investment advice could cause big loss. In bull market every decision of yours earns good profit but once market change the gears then it is very hard to survive in stock market.

41. What are the steps involved in online trading? Explain.

Ans: Online trading enables its customers to trade from anywhere. The following are the various steps involved in online trading.

(a) Registration: To begin with, an indenting buyer needs to find an appropriate and reliable shopping website to buy the desired product or products. Once the buyer finds the website, he or she needs to register his or her name by opening a shopping account with the website. For doing so, the buyer is required to key in details such as his or her name, address, unique user name and secret password.

(b) Placing an order: After opening an account, the buyer can start browsing through the products listed, go through other customers’ reviews and compare products. The buyer may select various items according to his or her preferences and put them in a ‘cart’. The buyer can place an order and proceed towards the payment window.

(c) Payment mechanism: In this step, the buyer chooses a preferred mode of payment. The following are the different payment modes that are generally available to a trading website user.

(i) Cash on delivery (COD): Here, payment is made in cash at the time of delivery of a product.

(ii) Cheque: The user makes payment through cheque, and when the cheque is realised, the goods selected are delivered by the seller.

(iii) Net banking: The user makes an electronic payment to the bank account of the online vendor through the Internet.

(iv) Credit or debit card: The user can also use a credit or debit card (also known as plastic money) to make an online payment. The payment so made is linked to the bank account of the user.

(v) Digital cash or e-cash: This type of currency has no physical existence. It is a system of purchasing cash in relatively small amounts and storing it in the computer system. The consumer can spend the cash when making electronic purchases over the Internet.

(d) Digital cash: Digital cash is a type of electronic currency which is found only in cyberspace. It has no physical real properties but still can be used as a real currency in an electronic format. The amount equal to the digital cash which the buyer wants to get issued in his favour is deposited by him in the bank dealing in digital cash through cheque, drafts, etc. The bank sends a special software to the buyer. Hence, while making online purchases, the buyer can make the payment by drawing digital cash from his account with the bank.

42. Explain the Trading and Settlement Procedure of Stock exchange.

Ans: Trading and Settlement Procedure are:

(i) Selecting a Broker or Sub-broker: When a person wishes to trade in the stock market, it cannot do so in his/her individual capacity. The transactions can only occur through a broker or a sub-broker. So according to one’s requirement, a broker must be appointed. Now such a broker can be an individual or a partnership or a company or a financial institution (like banks). They must be registered under SEBI. Once such a broker is appointed you can buy/sell shares on the stock exchange.

(ii) Opening a Demat Account: Since the reforms, all securities are now in electronic format. There are no issues of physical shares/securities anymore. So an investor must open a dematerialized account, i.e. a Demat account to hold and trade in such electronic securities. So you or your broker will open a Demat account with the depository participant. Currently, in India, there are two depository participants, namely Central Depository Services Ltd. (CDSL) and National Depository Services Ltd. (NDSL).

(iii) Placing Orders: And then the investor will actually place an order to buy or sell shares. The order will be placed with his broker, or the individual can transact online if the broker provides such services. One thing of essential importance is that the order/instructions should be very clear. Example: Buy 100 shares of XYZ Co. for a price of Rs. 140/- or less. Then the broker will act according to your transactions and place an order for the shares at the price mentioned or an even better price if available. The broker will issue an order confirmation slip to the investor.

(iv) Execution of the Order: Once the broker receives the order from the investor, he executes it. Within 24 hours of this, the broker must issue a Contract Note. This document contains all the information about the transactions, like the number of shares transacted, the price, date and time of the transaction, brokerage amount, etc. Contract Note is an important document. In the case of a legal dispute, it is evidence of the transaction. It also contains the Unique Order Code assigned to it by the stock exchange.

(v) Settlement: Here the actual securities are transferred from the buyer to the seller. And the funds will also be transferred. Here too the broker will deal with the transfer. There are two types of settlements:

(a) On the Spot settlement: Here we exchange the funds immediately and the settlement follows the T+2 pattern. So a transaction occurring on Monday will be settled by Wednesday (by the second working day).

(b) Forward Settlement: Simply means both parties have decided the settlement will take place on some future date. It can be T+% or T+9 etc.

43. Why are Index/Indices Important?

Ans: Indices are used across the global markets by financial professionals, institutions, and individuals for the following purposes:

(i) Stock market indices are the most significant and widely studied parameters in the financial market.

(ii) Investors and traders use the stock market index to analyse the market and manage their investment portfolios.

(iii) Financial institutions use the stock market indices to manage the investment portfolio of clients and draw performance comparisons based on the indices.

(iv) The stock indices indicate the mood and sentiment of the market at a given time. Investors can understand the market’s pattern by looking at the indices and placing profitable buying and selling calls.

(v) The stock index helps identify the profitable stocks and indicates how these stocks have performed compared to their peers.

(vi) Along with stocks, stock market indices show the trend prevailing in different sectors.

(vii) Investors can make passive investments by analysing the stock indices by choosing index funds that simply mimic the performance of an index.

44. What is the Need for Indices in the Stock Market in India?

Ans: Indices are essential in the Indian stock market for the following reasons:

(i) Grouping and sorting of stocks: Stock market indices make investing and trading easier for investors by grouping the stocks in an organised manner. An index allows the investors to analyse the best stocks together in one place. For example, for the Sensex index, the S&P BSE Sensex is a group of 30 selected Stocks, and S&P BSE is a group of 500 Stocks. Grouping helps the investors see the overall performance of a particular sector without having to study every individual stock from the sector.

(ii) Analysing stock and market performance: Stock market indices help an investor compare the performance of a stock against the benchmark stock in that sector. The index helps in understanding if the stock has been profitable compared to other stocks in the same index or if the stock is riskier than its peers.

45. What are the types of Stock Market Indices?

Ans: There are three different types of stock market indices mentioned below:

(i) Benchmark Indices: Nifty 50- a collection of top 50 best- performing stocks and BSE Sensex – a collection of top 30 best- performing stocks are indictors of the National Stock Exchange and Bombay Stock Exchange, respectively. This collection of stocks are known as benchmark indices respectively because they use the best practices to regulate the companies they pick. Hence they are known as the best point of reference for the working of markets in general.

(ii) Sectoral Indices: Both BSE and NSE have some good indicators that measure companies falling under one specific sector. Indices like S&P BSE Healthcare and NSE Pharma are considered good indicators of their respective changes in the pharmaceutical sector. Another prominent example could be S&P BSE PSU, and Nifty PSU Bank Indices are indicators of all the listed public sector banks. However, both the exchanges don’t have to have corresponding indices for all the sectors, but this is generally a significant cause.

(iii) Market-Cap Based Indices: Few indices choose companies based on their market capitalization. Market capitalization means the market value of any public traded company in the stock exchange. Indices like S&P BSE and NSE small cap 50 are a collection of companies that have a lower market capitalization in accordance with the rules set by the Security Exchange Board of India (SEBI).

(iv) Other Indices: Several other indices like S&P BSE 500, NSE 100, S&P BSE 100, among others, are slightly larger indices and come with a more significant number of stocks listed on them. You may have a low-risk appetite and stock listed on Sensex may have a high-risk appetite. Investment portfolio are not tailored to meet every needs. So investor has to be focused and invest in which they feels safe.

46. What are the Major Stock Exchanges in India?

Ans: Major Stock Exchanges in India:

(i) National Stock Exchange (NSE): Started in 1994, the National Stock Exchange (NSE) is the largest stock exchange in India in terms of total and average daily turnover for equity shares. Being a pioneer in technology, NSE has a fully-integrated business model to provide high- quality data and services to market participants and clients. It includes trading services, exchange listings, indices, market data feeds, clearing and settlement services, financial education offerings and technology solutions. NSE ensures that trading and clearing members and listed companies follow the rules and regulations of the exchange.

(ii) Bombay Stock Exchange (BSE): Founded in 1875, Bombay Stock Exchange Ltd. (BSE), is the fastest stock exchange in the world which has the speed of 6 microseconds. It provides an efficient, integrated, transparent and secure market for trading in equity, currencies, debt instruments, derivatives, mutual funds. It provides an array of services like clearing, settlement, risk management, education and market data services. It has a global reach with overseas customers and a nation-wide presence. It provides depository services through its Central Depository Services Ltd. (CDSL) arm. The S&P BSE SENSEX is India’s most widely tracked stock market benchmark index. It is traded internationally on the EUREX as well as leading exchanges of the BRICS nations (Brazil, Russia, China and South Africa).