NCERT Solutions | Class 12 Business Studies (Part II : Business Finance And Marketing) Chapter 10 | Financial Markets
CBSE Solutions | Business Studies Class 12
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NCERT | Class 12 Business Studies (Part II : Business Finance And Marketing)
| Book: | National Council of Educational Research and Training (NCERT) |
|---|---|
| Board: | Central Board of Secondary Education (CBSE) |
| Class: | 12 |
| Subject: | Business Studies |
| Chapter: | 10 |
| Chapters Name: | Financial Markets |
| Medium: | English |
Financial Markets | Class 12 Business Studies | NCERT Books Solutions
NCERT Solutions for Class 12 Commerce Business studies Chapter 2 Financial Market
Question 1:
What is a Treasury Bill?
Answer:
Treasury Bill is a short term promissory note issued by the Reserve Bank of India on behalf of the Central Government of India. They are issued to fulfil the short-term fund requirements of the Government of India. Maturity period of Treasury Bills ranges from 14 days to 364 days. Generally, these bills are brought by commercial banks, LIC, UTI, non-baking financial companies, etc. They are also called Zero-Coupon Bonds. Treasury bills are highly liquid instruments because of the fact that the RBI is always ready to purchase these bills. Moreover, they are also considered to be the safest instrument as they are issued by the RBI. They are available for a minimum amount of Rs 25,000 and in multiples thereof. Treasury Bills are issued at a discount i.e. they are issued at a price which is lower than the face value and are redeemed at par. Herein, the discount (the difference between the price of issue and the redemption value) is the interest received at the time of redemption.
Question 2:
Name the segments of the National Stock Exchange (NSE).
Answer:
National Stock Exchange is an Electronically driven stock exchange incorporated in 1992. NSE provides trading in two main segments:
1- Wholesale Debt Market Segment
2- Capital Market Segment
Question 3:
State any two reasons why investing public can expect a safe and fair deal in the stock market. (Point w.r.t safety of Transactions – Functions of the Stock Exchange).
Answer:
SEBI is set up to protect the interests of the parties involved in the exchange in capital market.
It performs following functions:
• Prohibition- Prohibits fraudulent and unfair trade practices. In addition, it prevents the spreading of misleading statements which are likely to affect the functioning of the securities market.
• Checks on insider trading: Insider trading refers to a situation wherein an individual connected with the company leaks out crucial information regarding the company which may adversely affect its share prices. SEBI keeps a strict check on such practices.
Question 4:
What is the common name for Beneficiary Owner Account, which is to be opened by the investors for trading in securities?
Answer:
The common name of the Beneficiary Account is Dematerialisation or DEMAT account.
A Dematerialisation Account (also known as Demat Account) is a pre-requisite for electronic trading in securities. In other words, if a person wants to trade the listed securities in electronic form, then it is mandatory for him/her to open up a Demat account in a depository bank.
Question 5:
Name any two details that need to be provided by the investor to the broker while filling a client registration form.
Answer:
Client need to furnish an Identity proof- Adhaar number; PAN number and proof of Address.
Question 1:
What are the functions of a financial market?
Answer:
A financial market refers to the market where the creation and exchange of financial assets such as shares and debentures takes place. The following are the functions of a financial market.
i) Transfer of Savings and Alternatives for Investment
A financial market acts a link between the savers and the investors. It provides a platform for the transfer of savings from the households to the investors. It also provides savers with various alternatives for investment and thereby, directs the funds to the most productive investment.
ii) Establishes the Price
Similar to a commodity, the price of a financial asset is established through the forces of demand and supply for funds. Financial market provides a platform for the interaction of the demand of the funds (represented by the business firms) and the supply of funds (represented by the households). Thereby, it helps in determining the price of the asset being traded.
iii) Facilitates Liquidity
An asset or a security can be easily purchased and sold in a financial market. This renders liquidity to the assets. That is, through trading in the financial market assets can be easily converted into cash or cash equivalents.
iv) Reduced Cost of Transaction
By rendering information regarding the securities being traded, their price, availability, etc., a financial market helps in reducing the cost of transaction in terms of effort, money and time.
Question 2:
''Money Market is essentially a Market for short term funds''. Discuss.
Answer:
Money market refers to the market for trading of short term securities and funds. Securities traded in the money market have a very short maturity period ranging from one day to one year. Such assets act as a close substitute for cash or money. Due to their short maturity period they are also known as 'Near Money instruments'. Money market instruments act as an important source of finance for working capital requirements. They enjoy a high degree of liquidity. DFHI discounts money market securities and offers a ready market for them. In addition, securities traded in the money market are safe and secure as the transactions are made in those instruments that are issued by financial institutions and those companies that are financially strong. Common instruments traded in the money market are treasury bills, commercial paper, call money, certificate of deposit, etc.
Question 3:
Distinguish between Capital Market and Money Market.
Answer:
The following points highlight the difference between Capital Market and Money Market.
|
Basis of Difference |
Capital Market |
Money Market |
|
Time Span of Securities |
Capital Market mainly deals in the trading of medium and long-term securities wherein, the maturity period is more than one year. |
Money Market deals in the trading of short-term securities wherein, the maturity period can vary from one day to a maximum of one year. |
|
Liquidity |
Capital market securities are liquid in nature as they are tradable on stock exchanges, but are less liquid in comparison to the money market securities. |
The securities traded are highly liquid in nature. DFHI discounts money market securities and offers a ready market for them. |
|
Returns Expected |
Expected returns are higher due to the possibility of capital gains in long-term and regular dividends or bonus. |
Expected returns are lower due to shorter duration. |
|
Instruments |
Instruments traded in capital market comprise of equity shares, preference shares, debentures, bonds and other long term securities. |
Instruments traded in money market comprise of treasury bills, commercial bills, certificate of deposits and other short-term securities. |
|
Risk |
Capital market securities involve greater risk in terms of repayment of the principal amount. |
Money market securities are less risky due to short time period and sound financial position of the issuers. |
Question 4:
What are the functions of a Stock Exchange?
Answer:
Stock Exchange refers to a market where buying and selling of the existing securities take place. The following are the main functions of a stock exchange.
(i) Provides Liquidity and Marketability: Stock exchange provides a ready platform for trading of existing securities. In other words, it provides a continuous market for the sale and purchase of securities. Through stock exchange, securities can be easily converted into cash whenever required. In addition, long-term securities can be converted to medium-term and short-term through stock exchange.
(ii) Determination of Prices: A stock exchange helps in establishing the price of the monetary assets that are traded in that market. It provides a platform for interaction for buyers and sellers of securities and thereby, helps in the determination of prices of the securities through the forces of demand and supply.
(iii) Fair and Safe Market: As stock exchange is a legal and well regulated market. It trades within the defined and the existing legal framework. Thereby, it ensures safety and fairness in transactions.
(iv) Facilitates Economic Growth: In a Stock Exchange the securities are continuously brought and sold. This continuous process of disinvestment and reinvestment helps in channelising the savings and the investments to the most productive use. This, enhances capital formation and economic growth.
(v) Spreading Equity Cult: Through regulation of the issues and better trading practices, a stock exchange helps in educating the people about investment. It promotes and encourages the people to invest in ownership securities.
(vi) Acts as an Economic Barometer: Through changes in the share prices, a stock exchange indicates the changes in economic conditions. For instance, a boom (or recession) is reflected in the rise (or fall) in the share prices.
(vii) Scope for Speculation: It is generally believed that certain degree of speculation is necessary for better liquidity and to maintain demand and supply of securities. Stock exchange provides a reasonable and controlled scope of speculation within the provisions of law.
Question 5:
What are the objectives of the SEBI?
Answer:
Securities and Exchange Board of India (SEBI) was established for promoting an orderly and healthy growth of the securities market in India. The following points highlight the overall objectives of SEBI.
(i) Regulation: The basic objective of SEBI is to regulate the functioning of stock exchange and the securities market. It aims at providing a place where the issuers of securities (i.e. companies) can raise funds in an easy and confident manner.
(ii) Protection: SEBI works on educating the investors and provide guidelines related to investment. It provides them adequate and reliable information about the companies and thereby, helps them in taking wise and informed investment decisions.
(iii) Prevention: To combat the malpractice in trading of securities was the basic reason for the establishment of SEBI. Malpractice such as insider trading, violation of rules and regulations, non-adherence to Companies Act, etc. erodes the confidence of investors. SEBI aims at checking these malpractice by creating a balance between the self regulation of a business and the legal statutory regulations.
(iv) Code of Conduct: Through regulation, SEBI develops a code of conduct for the fair trade practices by the intermediaries such as brokers, merchant bankers, underwriters, etc. SEBI controls the activities of these intermediaries and provides them a professional and competitive environment.
Question 6:
State the objectives of the NSE.
Answer:
National Stock Exchange of India was incorporated in the year1992. It was recognised as Stock Exchange in 1993 and started operations in 1994. It was established by leading banks, financial institutions, insurance companies and financial intermediaries. NSE was established with the following objectives.
(i) NSE aimed at setting up a single nationwide trading system for providing the trading facility in all types of securities. Such a system increases the confidence of the investors.
(ii) It ensured that all the investors over the country get an easy and equal access through an appropriate communication network. It increases the liquidity of the securities. Under the system of regional stock exchange the number of people involved in the transaction was limited. As against this, NSE incorporates transactions from investors from the entire country and thereby, increases the liquidity of the securities.
(iii) By using an electronic trading system, NSE aims at providing a fair, efficient and transparent securities market. Any person can get information regarding the trading of various securities from the local terminals of NSE. Thereby, it helps in reducing fraud in trading.
(iv) One of the objectives of NSE includes enabling shorter settlement cycles and book entry settlements.
(v) NSE aimed at meeting the international standards and benchmarks of stock exchange.
Question 7:
Name the document prepared in the process of online trading of securities that is legally enforceable and helps to settle disputes/claims between the investor and the broker.
Answer:
A Contract Note is enforceable under law. This note contains details of the number of shares bought or sold, the price, the date and time of deal, and the brokerage charges.
Question 1:
Explain the various Money Market Instruments.
Answer:
Money Market refers to the market where short term funds are traded. Herein, short term funds are in the form of monetary assets having a maturity period of maximum one year. The following are some of the common money market instruments.
(i) Treasury Bil (T-Bills)
Treasury Bill refers to a promissory note used for short term borrowing by the government. They are the most commonly used money market instrument. They are auctioned and issued by the Reserve Bank of India on behalf of the Central Government. T-bills are available for a minimum of Rs 25,000 and in multiples thereof. Generally, three types of treasury bills are issued 91-days, 182-days and 364-days. T-Bills are issued at a discount and redeemed at par. That is, they are issued at a price lower than their face value and at the time of redemption, the investor gets the amount equal to the face value. The difference between the value at which they are issued and the redemption value is the interest received on them. For example, if an investor purchases a 182-days treasury bill with a face value of Rs 56,000 for Rs 50,000. At the time of maturity, the investor will receive Rs 56,000. Thus, the difference of Rs 6,000 (56,000 − 50,000) is the interest receivable on the bill. T-Bills are also called Zero-Coupon Bonds. T-bills are highly liquid bonds. Moreover, as they are issued by the RBI, they have negligible risk and offer assured return.
(ii) Call Money
Call money is an instrument used for interbank transactions. Through call money, the banks borrow from each other to meet any shortage of funds required to maintain CRR. That is, any bank in shortage of funds borrows from other bank having surplus funds. Call money have a very short maturity period ranging from one day to fifteen days. Interest paid on such loans is known as call rate. Call rate is highly volatile and varies from day to day. There exists a negative relationship between call rate and other money market instruments such as Commercial Papers and Certificate of Deposits. That is, as the call rate rise, other instruments of money market become cheaper and their demand increases.
(iii) Commercial Paper (CPs)
Commercial paper is an unsecured short term money market instrument. It is a negotiable and transferable promissory note with a maturity period ranging from a minimum of 15-days to a maximum of one year. They were introduced in India in 1990. CPs are mainly issued by large and creditworthy companies to raise short-term funds. Large companies view Commercial Papers as an alternative to bank borrowings and borrowings through capital market. The rate of interest payable on Commercial Papers is lower than the market rates. Generally, companies use Commercial Papers for bridge financing. That is, to raise the funds required to meet the floatation cost incurred on long term borrowings in the capital market. For example, if a company wishes to raise finance from the capital market to purchase land. For this, it will have to incur floatation cost such as cost related to brokerage, commission, advertising, etc. To finance such floatation costs the company can issue Commercial Paper.
(iv) Certificate of Deposit (CDs)
Certificate of Deposits are time deposits which are negotiable and unsecured in nature. They are bearer instruments for a short and specified time period ranging from one month to more than five years. CDs are a secured form of investment, which are issued to individuals, corporations and companies by the commercial banks and development financial institutions. Herein, higher interests are offered for higher deposits. They are issued to meet the demand for credit in times of tight liquidity position. For example, when a person buys a CD by depositing a specific amount, he receives a certificate wherein the term of deposit, the interest rate applicable and the date of maturity is written. On the date of maturity, the individual gets entitled to receive the principle amount and the earned interest on it.
(v) Commercial Bill
Commercial bill also known as bank bill or bill of exchange refers to the instrument used to finance the working capital requirements of a firm. It is a short term negotiable instrument. Companies use Commercial Bills to finance their credit sales. For example, when an individual makes credit sales, the buyer becomes liable to make the payment on a specified future date. Herein, the seller draws a bill of exchange and gives it to the buyer mentioning a specific maturity period. Once the bill is accepted by the buyer it becomes a marketable instrument which can be discounted with a bank. For instance, if the seller requires funds before the maturity period, he can discount the bill with a commercial bank.
Question 2:
Explain the recent Capital Market reforms in India.
Answer:
A capital market refers to the market that deals in the trading of medium and long-term securities. That is, it deals in those securities that have a maturity period of greater than or equal to one year. Capital market comprises of instruments such as equity and preference shares, debentures, bonds, mutual funds, public deposits, etc. A capital market can be divided in two parts namely, Primary Market and Secondary Market. Primary market deals with issue of new securities. Issue of new securities in the primary market directs funds towards those entrepreneurs who either want to start a new enterprise or wish to expand the existing one. Secondary market, on the other hand, deals in the sale and purchase of the existing securities. That is, it deals in the trading of those securities that were initially issued in the primary market.
The history of capital market in the form of stock exchange dates back to the eighteenth century. The Government of India introduced the Companies Act in 1850 with the aim of generating investor interest in corporate securities. The first stock exchange was set up in India in the year 1875 as 'The Native Share and Stock Brokers Association' in Bombay. Later it was renamed as 'Bombay Stock Exchange' (BSE). In the subsequent years stock exchanges were developed in Ahemdabad, Calcutta and Madras.
In 1990s, the Indian secondary market only consisted of regional stock exchanges wherein, first being the BSE. However, after the reforms of 1991, the Indian Stock Market acquired a three-tier system. This consisted of Regional Stock Exchanges, National Stock Exchange and Over the Counter Exchange of India (OTCEI).
Regional Stock Exchange
The first Regional Stock Exchange was developed in Ahemdabad as Ahmedabad Stock Exchange (ASE) in 1894. Similarly, in 1908, Calcutta Stock Exchange (CSE) was established. Subsequently in the later years other regional stock exchanges were established in Calcutta, Madras, Ahemdabad, Delhi, Hyderabad and Indore. Recently, regional stock exchanges were developed in Coimbatore as Coimbatore Stock Exchange and in Meerut as Meerut Stock Exchange. Currently, there are 22 regional stock exchanges in India.
National Stock Exchange
The NSE is the latest technology driven stock exchange which was recognised in 1993. It started its operations in 1994 with trading in money market securities. Later, it also expanded its trading operations in capital market segment. NSE was set up in order to establish a nationwide platform for trading in all types of securities. It ensured development of fair and efficient securities market. Within the span of its existence, NSE has transformed the Indian capital market and has been able to take the stock market to the investor's door step. It has provided a wide screen-based automated trading system across the nation ensuring equal access to all the investors.
Over the Counter Exchange of India (OTCEI)
OTCEI is a company which was set up in 1990 under the Companies Act,1956 but later was recognised as a stock exchange under the Securities Contracts Regulation Act, 1956. It commenced its operations in trading in 1992 and is modelled along the lines of NASDAQ, the OTC exchange in USA. It aims at providing the small companies an easy access to the capital market. OTCEI provides a screen based nationwide trading system, that acts as a place where buyers meet the sellers and negotiate for an acceptable terms of trade. Herein, dealers can trade both in new issue of securities as well as secondary market. It is a single window exchange which provides a convenient, transparent and efficient avenue for capital market investment.
Question 3:
Explain the objectives and functions of the SEBI.
Answer:
The Securities and Exchange Board of India was established in 1988 in order to encourage an orderly and healthy growth of the securities market. SEBI was set with an overall objective of investor protection and to promote the development and regulation of the functions of the securities market. The following are the listed objectives.
(i) Regulation: The main objective of SEBI was to regulate the functioning of the stock exchange and the securities market. It aims at providing a place where the issuers of securities (i.e. companies) can raise funds in an easy and confident manner.
(ii) Protection: SEBI educates the investors by providing them valuable information regarding various securities and companies. It provides them with the guidelines related to efficient investment. It provides them adequate and reliable information about the companies and thereby, helps them in taking wise and informed investment decisions.
(iii) Prevention: To combat the malpractice in trading of securities was the basic reason for the establishment of SEBI. Malpractice such as insider trading, violation of rules and regulations, non-adherence to Companies Act, etc. erodes the confidence of investors. SEBI aims at checking these malpractice by creating a balance between the self regulation of a business and the legal statutory regulations.
(iv) Code of Conduct: Through efficient regulation, SEBI aims at developing a code of conduct for fair trade practices by intermediaries such as brokers, merchant bankers, underwriters, etc. This helps in making them competitive and professional.
To attain the aforementioned objectives, SEBI perform 3 main functions namely, Regulatory, Development and Protective functions. The following are the functions performed by SEBI.
(i) Regulatory Functions
• Registration: One of the regulatory functions performed by SEBI is the registration of the brokers, sub-brokers, agents and other players in the market. Registration of collective mutual schemes and Mutual Funds is also done by SEBI.
• Regulating the Work: SEBI regulates the working of the stock brokers, underwriters, merchant bankers and other market intermediaries. It frames rules and regulations for the working of the intermediaries. SEBI also regulates the takeover bids by the companies. It conducts regular enquires and audits of stock exchange and intermediaries.
• Regulation by Legislation: SEBI performs and exercise various other powers which are delegated by the Government of India under the Securities Contracts (Regulation) Act, 1956. Besides, it levies fee or other charges for carrying out the purposes of the Act.
(ii) Development Functions
• Training: SEBI promotes the training and development of the intermediaries of the securities market in order to promote healthy growth of the securities market.
• Research: By conducting research in the required and important areas of the securities market, SEBI publishes useful information. This helps the investors and other market players to make wise investment decisions.
• Flexible Approach: SEBI has adopted a flexible and adaptive approach such permitting internet trading, IPOs, etc. Such measures promote the development of capital market.
(iii) Protective Functions
• Prohibition: SEBI prohibits fraudulent and unfair trade practices. It prevents the spreading of misleading and manipulative statements which are likely to affect the working of the securities market. SEBI educates the investors by providing them valuable information regarding various securities and companies so as to enable them to make wise investment decisions.
• Checks on Insider Trading: Insider trading refers to a situation where an individual connected with the company leaks out crucial information regarding the company. Such information may adversely affect its share prices. SEBI keeps a strict check on such insider trading.
• Promotion and Protection: SEBI encourage fair trade practices and promotes a code of conduct for the intermediaries. It undertakes step for investor protection and education. It also checks the manipulation of price of securities.
Question 4:
India’s largest domestic investor Life Insurance Corporation of India has once again come to government’s rescue by subscribing 70% of Hindustan Aeronautics’ ₹4,200-crore initial public offering.
a. Which market is being reflected in the above case?
b. State which method of floatation in the above identified market is being highlighted in the case? (Primary Market)
c. Explain any two other methods of floatation. (Private Placement, Offer through prospectus, offer for sale).
Answer:
(a) Primary Market has been referred above. Primary market refers to a market that deals with the issue of new securities. It directs funds towards those entrepreneurs who either want to start a new enterprise or wish to expand the existing one.
(b) Right Issue mode of floatation has been mentioned above. In this method, existing shareholders are offered subscription of new shares of the company in proportion to the number of shares possessed by them.
(c) Other methods of floatation:
i. Offer through prospectus- Under this method, a prospectus is published in newspapers, magazines, etc., in accordance with the guidelines and rules listed under the Companies Act and SEBI disclosure. The subscriptions are then invited from the public through this prospectus.
ii. Private Placement- In this method, the securities are sold only to some selected individuals and big institutional investors rather than to the general public. Herein, companies either allot the securities themselves or sell them to intermediaries who in turn sell these securities to selected clients.
Question 5:
Lalita wants to buy shares of Akbar Enterprises, through her broker Kushvinder. She has a Demat Account and a bank account for cash transactions in the securities market. Discuss the subsequent steps involved in the screen-based trading for buying and selling of securities in this case.
Answer:
Steps involved in the screen based trading of securities:
1. Enter into an agreement with a registered broker or sub-broker
2. Place the order with the broker
3. Broker goes online and check for the best prices
4. Once the prices are within the acceptable range, transaction is executed
5. Issue of Contract Note(within 24 hours)
6. Surrender of shares or making payment against contract note immediately(pay-in-day)
7. Cash paid or securities delivered before T + 2 day (same day)
8. Exchange delivers or makes payment to the other broker on T+2 day (payout day)
9. Broker makes delivery of securities in Demat form to investors account
NCERT Class 12 Business Studies (Part II : Business Finance And Marketing)
Class 12 Business Studies Chapters | Business Studies Class 12 Chapter 10
NCERT Solutions For Class 12 Business Studies
Class 12 Business Studies NCERT Solutions (Part I : Principles And Functions Of Management)
-
NCERT Solutions For Class 12 Business Studies Chapter 1 Nature And Significance Of Management
NCERT Solutions For Class 12 Business Studies Chapter 2 Principles Of Management
NCERT Solutions For Class 12 Business Studies Chapter 3 Business Environment
NCERT Solutions For Class 12 Business Studies Chapter 4 Planning
NCERT Solutions For Class 12 Business Studies Chapter 5 Organising
NCERT Solutions For Class 12 Business Studies Chapter 6 Staffing
NCERT Solutions For Class 12 Business Studies Chapter 7 Directing
NCERT Solutions For Class 12 Business Studies Chapter 8 Controlling
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