NIOS Class 12 Business Studies Chapter 13 The Financial Market

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NIOS Class 12 Business Studies Chapter 13 The Financial Market

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Also, you can read the NIOS book online in these sections Solutions by Expert Teachers as per National Institute of Open Schooling (NIOS) Book guidelines. These solutions are part of NIOS All Subject Solutions. Here we have given NIOS Class 12 Business Studies Chapter 13 The Financial Market, NIOS Senior Secondary Course Data Business Studies for All Chapter, You can practice these here.

The Financial Market

Chapter: 13

Module – 3 Business Finance

INTEXT QUESTIONS 13.1 

1. Define the financial market.

Ans: It is a market that facilitates transfer of funds between investors/lenders and borrowers/users. It deals in financial instruments like bills of exchange, shares, debentures, bonds etc.   

2. Complete the table given below. 

(a) Distinction between Primary Market and Secondary Market.

Points of differencePrimary MarketSecondary Market
(i) Function(a) (a) To provide continuous and ready market for existing long-term securities.
(ii) Participants(b) Financial Institutions, mutual funds, underwriters and individual investors.(b) 
(iii) Listing Requirement(c) Listing is not required for dealing in the primary market. (c) 
(iv) Determination of pricesPrices are determined by forces of demand and supply and keep on fluctuating. 

Ans:

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Points of differencePrimary MarketSecondary Market
(i) Function(a)  To raise long-term funds through fresh issue of securities.(a) To provide continuous and ready market for existing long-term securities.
(ii) Participants(b) Financial Institutions, mutual funds, underwriters and individual investors.(b) Stock brokers who are members of the stock exchange and mutual funds, financial institutions, and individual investors. 
(iii) Listing Requirement(c) Listing is not required for dealing in the primary market. (c) Listing in stock exchange is required to deal in a security in the stock exchange.  
(iv) Determination of pricesPrices are determined by the company/institution’s management, with due confirmation with SEBI. Prices are determined by forces of demand and supply and keep on fluctuating. 

(b) Differentiate between Money Market and Capital Market.

Points of distinctionMoney MarketCapital market
(i) Time period / Term
(ii) Instruments dealt in
(iii) Participants
(iv) Regulatory body 

Ans:

Points of distinctionMoney MarketCapital market
(i) Time period / TermDeals with Long term funds.Deals in short-term funds.
(ii) Instruments dealt inDeals in shares, debenture, bonds and government securities.Deals in securities like treasury bills, commercial paper, bills of exchange, certificate of deposits etc. 
(iii) ParticipantsStock brokers,underwriters, mutual, funds, financial institutions. Participants are commercial banks, non-banking finance companies, chit funds etc. 
(iv) Regulatory body SEBI (Securities).RBI (Reserve Bank of India) Exchange Board of India.)

INTEXT QUESTIONS 13.2 

1. Enumerate the main characteristics of a stock exchange. 

2. Identify which of the following statements about stock exchanges are ‘True’ or ‘False’. If the statement is ‘False’, rewrite it in the correct form. 

(a) Stock Exchange provides a ready market for sale and purchase of gold and silver. ( )

Ans: (a) False: Stock Exchange provides a ready market for sale and purchase of various shares, debentures, bonds and government securities.  

(b) In the stock exchange, transactions take place between companies and their shareholders directly. ( ) 

Ans: (b) False: In the stock exchange, transactions take place between its members or their authorised agents.

(c) Stock exchange transactions facilitate flow of funds from less profitable to more profitable enterprises. ( ) 

Ans: True.

(d) It becomes difficult for investors to raise loans from banks against collateral of their holdings in securities traded at the stock exchange.

Ans: False: It becomes easy for investors to raise loans from banks against collateral of their holdings in securities traded at the stock exchange.  

(e) Speculation is the same thing as gambling. ( )

Ans: False: Speculation is different from gambling. 

3. State two limitations of stock exchanges.

Ans: (a) Excessive speculation.

(b) Fluctuation in security prices due to unpredictable political, social and economic factors as well as on account of rumours spread.  

INTEXT QUESTIONS 13.3 

1. State any three main objectives for which SEBI was granted statutory recognition in 1992.

Ans: (a) protecting interest of investors.

(b) promoting development of securities market.

(c) regulating the securities market.  

2. Give a specific term/name for the following: 

(a) The prominent stock exchange enjoying nation wide coverage that commenced operations in 1994. ( )

Ans: National Stock Exchange (NSE).  

(b) The stock exchange that specially caters to small and medium-sized companies. ( )

Ans: Over The Counter Exchange of India (OTCEI).  

(c) The first organised stock exchange in India. ( )

Ans: Bombay Stock Exchange (BSE).  

(d) The Act passed in the year 1956 for providing recognition of stock exchanges by the central government. ( )

Ans: Securities Contracts (Regulation) Act. 

(e) The regulatory body of stock exchanges in our country granted statutory recognition in the year 1992.

Ans: Securities and Exchange Board of India (SEBI).

3. List any three primary market reforms initiated by SEBI.

Ans: (i) Improved disclosure standards in public issue documents. 

(ii) Introduction of prudential norms. 

(iii) Simplification of the issue procedures.  

4. Complete the following sentences with the correct choice: 

(i) NSDL is the name of _____________. 

(a) Depository. 

(b) Company. 

(c) Investor. 

(d) None of the above. 

Ans: (a) Depository.  

(ii) Investor who wants to keep his securities in electronic form opens a ________ account with a Depository Participant. 

(a) Savings. 

(b) Current. 

(c) Demat. 

(d) Both (a) and (b).

Ans: (c) Demat. 

TERMINAL EXERCISE

Very Short Answer Questions:

1. What do you mean by ‘Financial Market’? 

Ans: financial markets act as a link between these two different groups. It facilitates this function by acting as an intermediary between the borrowers and lenders of money. It consists of individual investors, financial institutions and other intermediaries who are linked by formal trading rules and communication network for trading the various financial assets and credit instruments. 

2. Give four examples of credit instruments of money market. 

Ans: The four examples of credit instruments of money market are:

(i) Treasury Bills.

(ii) Commercial Paper.

(iv) Certificates of Deposit (CDs).

(v) Repurchase Agreements (Repos).

3. State the meaning of capital market. 

Ans: Capital Market may be defined as a market dealing in medium and long-term funds. It is an institutional arrangement for borrowing medium and long-term funds and provides facilities for marketing and trading of securities. So, it constitutes all long-term borrowings from banks and financial institutions, borrowings from foreign markets and raising of capital by issue of various securities such as shares, debentures, bonds, etc.

4. List any two advantages of stock exchanges to companies. 

Ans: (i) The companies whose securities have been listed on a stock exchange enjoy a better goodwill and credit-standing than other companies because they are supposed to be financially sound. 

(ii) The market for their securities is enlarged as the investors all over the world become aware of such securities and have an opportunity to invest. 

5. Mention the organisations that are part of the organised money market in India. 

Ans: Major participants in the Organized Money Market in India include – the RBI, Banks, Commercial Banks, Cooperative Banks etc. 

6. What do you mean by ‘Depository’? 

Ans: Depository is like a bank in which an investor can deposit and withdraw his shares. Depository Participant (DP) is an agent of the depository. Investors interact only with DPs. Any financial institution can become DP after registration with SEBI. The company whose shares are to be transacted in electronic form must be registered with a depository. 

Short Answer Questions

1. Define money market and explain its importance in a modern economy. 

Ans: The money market is a market for short-term funds, which deals in financial assets/instruments whose period of maturity is less than or upto one year. It should be noted that money market does not deal in cash or money as such but simply provides a market for short term credit instruments such as bills of exchange, promissory notes, commercial paper, treasury bills, etc.

These financial instruments are close substitutes of money. These instruments help the business units, other organisations and the government to borrow the funds to meet their short-term financing requirements. The most active participants in money markets are commercial banks and other financial institutions. 

2. What is capital market? How does it differ from money market? 

Ans: Capital Market may be defined as a market dealing in medium and long-term funds. It is an institutional arrangement for borrowing medium and long-term funds and provides facilities for marketing and trading of securities. So, it constitutes all long-term borrowings from banks and financial institutions, borrowings from foreign markets and raising of capital by issue of various securities such as shares, debentures, bonds, etc.

BasisCapital MarketMoney Market
Period of FundsMoney market is related to short-term funds.While the capital market is related to medium and long-term funds.
Nature of SecuritiesMoney market deals in securities like treasury bills, commercial paper, trade bills, deposit certificates, etc.On the other hand, the capital market deals in shares, debentures, bonds and government securities.
ParticipantsThe participants in money market are commercial banks, non banking financial companies, etc.While the participants in capital market are stockbrokers, underwriters, mutual funds, financial institutions, and individual investors. 
RegulatorMoney market is regulated by Reserve Bank of India.While the Capital market is regulated by Securities Exchange Board of India (SEBI). 

3. Distinguish between primary market and secondary market.

Ans:

BasisPrimary marketSecondary market
(i) Function While the main function of primary market is to raise long-term funds through fresh issue of securities.The main function of secondary market is to provide continuous and ready market for the existing long-term securities.
(ii) Participants While the major players in the primary market are financial institutions, mutual funds, underwriters and individual investors.The major players in secondary market are all of these and corporations/companies, stockbrokers who are members of the stock exchange.
(iii) Listing RequirementPrimary market issues there are no such requirements.For securities to be traded in stock market, their listing is mandatory
(iv) Determination of Prices In the case of primary market, the prices are determined by the management with due compliance with SEBI requirement for new issue of securities. But in the case of the secondary market, the price of the securities is determined by forces of demand and supply of the market and keeps on fluctuating.

4. How does the stock exchange help in mobilising savings and capital formation? 

Ans: Efficient functioning of stock market creates a conducive climate for an active and growing primary market. Good performance and outlook for shares in the stock exchanges imparts buoyancy to the new issue market, which helps in mobilising savings for investment in industrial and commercial establishments. Not only that, the stock exchange provides liquidity and profitability to dealings and investments in shares and debentures. It also educates people on where and how to invest their savings to get a fair return. This encourages the habit of saving, investment and risktaking among the common people. Thus, it helps mobilising surplus savings for investment in corporate and government securities and contributes to capital formation.

5. Describe the measures taken by SEBI to regulate the secondary market. 

Ans: SEBI through the passage of securities law (Amendment) Act in 1995. Measures in the secondary market are: 

(i) SEBI has duly notified rules and a code of conduct to regulate the activities of intermediaries in the securities market and then registration in the securities market and then registration with SEBI is made compulsory. 

(ii) It has issued guidelines for composition of the governing bodies of stock exchanges so as to include more public representatives. 

(iii) Corporate membership has also been introduced at the stock exchanges. 

(iv) It has notified the regulations on insider trading to protect and preserve the integrity of stock markets and issued guidelines for mergers and acquisitions. 

(v) SEBI has constantly reviewed the traditional trading systems of Indian stock exchanges and tried to simplify the procedure, achieve transparency in transactions and reduce their costs. 

(vi) To prevent excessive speculations and volatility in the market, it has done away with badla system, and introduced rolling settlement and trading in derivatives 

(vii) All stock exchanges have been advised to set-up clearing corporation / settlement guarantee fund to ensure timely settlements. 

(viii) SEBI organises training programmes for intermediaries in the securities market and conferences for investor education all over the country from time to time. 

6. What is meant by a ‘Demat’ account? 

Ans: Demat account is the abbreviation of dematerialised account. Demat account refers to an account which an Indian citizen must open with the DPs to trade in listed securities in electronic form. From this account one can hold shares of various companies in the dematerialised/electronic form.

7. Anil wants to invest money in share market. As a financial advisor what will you suggest him to do?

Ans: Students, do yourself.

Long Answer Questions

1. Define stock exchange and explain its functions. 

Ans: A stock exchange is generally organised as an association, a society or a company with a limited number of members. It is open only to these members who act as brokers for the buyers and sellers. The Securities Contract (Regulation) Act has defined assisting, regulating and controlling business of buying, selling and dealing in securities stock exchange as an ” association, organisation or body of individuals, whether incorporated or not, established for the purpose”. Considering the role played by stock exchange in the economic growth of the country it is often referred as barometer of the economic health/situation of the country.

The functions of stock exchange can be enumerated as follows: 

(i) Provides a Ready Market for Securities: By providing a place where listed securities can be bought and sold regularly and conveniently, a stock exchange ensures a ready and continuous market for various shares, debentures, bonds and government securities. This lends a high degree of liquidity to holdings in these securities as the investors can encash their holdings as and when they want. 

(ii) Provides Information about Prices and Sales of Securities: A stock exchange maintains complete record of all transactions taking place in different securities every day and supplies regular information on their prices and sales volumes to press and other media. In fact, now-a-days, you can get information about minute to minute movement in prices of selected shares on various business TV channels. This enables the investors in taking quick decisions on purchase and sale of securities in which they are interested. 

(iii) Provides Safety to Securities Dealings and Investment: Transactions on the stock exchange are conducted only amongst its members with adequate transparency and in strict conformity to its rules and regulations which include the procedure and timings of delivery and payment to be followed. This provides a high degree of safety to dealings at the stock exchange. There is little risk of loss on account of non-payment or non-delivery. Securities and Exchange Board of India (SEBI) also regulates the business in stock exchanges in India and the working of the stock brokers. Not only that, a stock exchange allows trading only in securities that have been listed with it; and for listing any security, it satisfies itself about the genuineness and soundness of the company and provides for disclosure of certain information on regular basis. 

(iv) Facilitates Mobilisation of Savings and Capital Formation: Efficient functioning of stock market creates a conducive climate for an active and growing primary market. Good performance and outlook for shares in the stock exchanges imparts buoyancy to the new issue market, which helps in mobilising savings for investment in industrial and commercial establishments. Not only that, the stock exchange provides liquidity and profitability to dealings and investments in shares and debentures. It also educates people on where and how to invest their savings to get a fair return. 

(v) Barometer of Economic and Business Conditions: Stock exchanges reflect the changing conditions of economic health of a country, as the shares prices are highly sensitive to changing economic, social and political conditions. It is observed that during the periods of economic prosperity, the share prices tend to rise. Conversely, prices tend to fall when there is economic stagnation and the business activities slow down as a result of depression. 

(vi) Efficient Allocation of Funds: As a result of stock market transactions, funds flow from the less profitable to more profitable enterprises and they avail of the greater potential for growth. Financial resources of the economy are thus, better allocated.  

2. Explain the importance of stock exchanges from the point of view of companies and investors. 

Ans: (a) To the Companies:

(i) The companies whose securities have been listed on a stock exchange enjoy a better goodwill and credit-standing than other companies because they are supposed to be financially sound. 

(ii) The market for their securities is enlarged as the investors all over the world become aware of such securities and have an opportunity to invest. 

(iii) As a result of enhanced goodwill and higher demand, the value of their securities increases and their bargaining power in collective ventures, mergers, etc. is enhanced. 

(iv) The companies have the convenience to decide upon the size, price and timing of the issue. 

(b) To the Investors: 

(i) The investors enjoy the ready availability of facility and convenience of buying and selling the securities at will and at an opportune time. 

(ii) Because of the assured safety in dealings at the stock exchange, the investors are free from any anxiety about the delivery and payment problems. 

(iii) Availability of regular information on prices of securities traded at the stock exchanges helps them in deciding on the timing of their purchase and sale. 

(iv) It becomes easier for them to raise loans from banks against their holdings in securities traded at the stock exchange because banks prefer them as collateral on account of their liquidity and convenient valuation.

3. Explain the role played by SEBI in protecting investors’ interests and controlling the business at stock exchange. 

Ans: As part of its efforts to protect investors’ interests, SEBI has initiated many primary market reforms, which include: 

(i) Improved disclosure standards in public issue documents.

(ii) Introduction of prudential norms and simplification of issue procedures. 

(iii) Companies are now required to disclose all material facts and risk factors associated with their projects while making public issue. All issue documents are to be vetted by SEBI to ensure that the disclosures are not only adequate but also authentic and accurate. 

(iv) SEBI has also introduced a code of advertisement for public issues for ensuring fair and truthful disclosures. 

(v) Merchant bankers and all mutual funds including UTI have been brought under the regulatory framework of SEBI. A code of conduct has been issued specifying a high degree of responsibility towards investors in respect of pricing and premium fixation of issues. 

(vi) To reduce cost of issue, underwriting of issues has been made optional subject to the condition that the issue is not under-subscribed. In case the issue is undersubscribed i.e., it was not able to collect 90% of the amount offered to the public, the entire amount would be refunded to the investors. 

(vii) The practice of preferential allotment of shares to promoters at prices unrelated to the prevailing market prices has been stopped and private placements have been made more restrictive. 

(viii) All primary issues have now to be made through depository mode. The initial public offers (IPOs) can go for book building for which the price band and issue size have to be disclosed. Companies with dematerialised shares can alter the par value as and when they so desire. SEBI defines book building as a process undertaken by which a demand for securities proposed to be issued by a body corporate is elicited and build-up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda of offer document.”

As part of economic reforms programme started in June 1991, the Government of India initiated several capital market reforms, which included the abolition of the office of the Controller of Capital Issues (CCI) and granting statutory recognition to Securities Exchange Board of India (SEBI) in 1992 for: 

(a) protecting the interest of investors.

(b) promoting the development of securities market. 

(c) regulating the securities market and. 

(d) matters connected therewith or incidental thereto. 

4. Give explanatory notes on: 

(a) stock exchange in India.

Ans: Stock exchange is the term commonly used for a secondary market, which provides a place where different types of existing securities such as shares, debentures and bonds, government securities can be bought and sold on a regular basis. A stock exchange is generally organised as an association, a society or a company with a limited number of members. It is open only to these members who act as brokers for the buyers and sellers. The Securities Contract (Regulation) Act has defined assisting, regulating and controlling business of buying, selling and dealing in securities stock exchange as an ” association, organisation or body of individuals, whether incorporated or not, established for the purpose”. 

(b) Regulations of stock exchanges.

Ans: The stock exchanges suffer from certain limitations and require strict control over their activities in order to ensure safety in dealings thereon. Hence, as early as 1956, the Securities Contracts (Regulation) Act was passed which provided delete space for recognition of stock exchanges by the Central Government. It had also the provision of framing of proper bylaws by every stock exchange for regulation and control of their functioning subject to the approval by the Government. All stock exchanges are required to submit information relating to its affairs as required by the Government from time to time. The Government was given wide powers relating to listing of securities, make or amend bylaws, withdraw recognition to, or supersede the governing bodies of stock exchange in extraordinary/abnormal situations. Under the Act, the Government promulgated the Securities Regulations (Rules) 1957, which provided inter alia for the procedures to be followed for recognition of the stock exchanges, submission of periodical returns and annual returns by recognised stock exchanges, inquiry into the affairs of recognised stock exchanges and their members, and requirements for listing of securities.   

5. Describe the two components of the securities market in detail. 

Ans: The market where financial securities are traded is known as securities market. It consists of two different segments, namely primary and secondary market.

(i) Primary market: The Primary Market consists of arrangements which facilitate the procurement of long-term funds by companies by making fresh issue of financial securities (borrowed as well as owned securities). You know that companies make fresh issue of shares and/or debentures at their formation stage and, if necessary, subsequently for the expansion of business. It is usually done through private placement to friends, relatives and financial institutions or by making public issue through initial public offerings (IPO) or follow-on public offerings (FPO). 

(ii) Secondary market: The secondary market also known as stock market or stock exchange plays an equally important role in mobilising long-term funds by providing the necessary liquidity to holdings in shares and debentures. It provides a place where these securities can be encashed without any difficulty and undue delay. It is an organised market where shares, and debentures are traded regularly with high degree of transparency and security. In fact, an active secondary market facilitates the growth of primary market as the investors in the primary market are assured of a continuous market for liquidity of their holdings. The major players in the primary market are merchant bankers, mutual funds, financial institutions, and the individual investors. In the secondary market you have all these and the stockbrokers who are members of the stock exchange who facilitate trading.     

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