NIOS Class 12 Business Studies Chapter 13 The Financial Market

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NIOS Class 12 Business Studies Chapter 13 The Financial Market

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 difference	Primary Market	Secondary 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 prices		Prices are determined by forces of demand and supply and keep on fluctuating.

Ans:

Points of difference	Primary Market	Secondary 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 prices	Prices 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 distinction	Money Market	Capital market
(i) Time period / Term
(ii) Instruments dealt in
(iii) Participants
(iv) Regulatory body

Ans:

Points of distinction	Money Market	Capital market
(i) Time period / Term	Deals with Long term funds.	Deals in short-term funds.
(ii) Instruments dealt in	Deals in shares, debenture, bonds and government securities.	Deals in securities like treasury bills, commercial paper, bills of exchange, certificate of deposits etc.
(iii) Participants	Stock 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.

Basis	Capital Market	Money Market
Period of Funds	Money market is related to short-term funds.	While the capital market is related to medium and long-term funds.
Nature of Securities	Money 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.
Participants	The 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.
Regulator	Money 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:

Basis	Primary market	Secondary 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 Requirement	Primary 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.