Samacheer Kalvi Class 12 Commerce Solutions Chapter 5 Capital Market

I. Choose The Correct Answer.

Question 1. Capital market do not provide
(a) Short term Funds
(b) Debenture Funds
(c) Equity Funds
(d) Long term Funds
Answer: (a) Short term Funds
In simple words: The capital market helps businesses get money for a long time, not for short-term needs. Things like debentures and equity are for long-term growth.

🎯 Exam Tip: Remember the main purpose of the capital market is to provide long-term funds, so anything short-term would be the correct exclusion.

Question 2. When the NSEI was established
(a) 1990
(b) 1992
(c) 1998
(d) 1997
Answer: (b) 1992
In simple words: The NSEI, which is a stock exchange, was created in the year 1992. This was an important step for India's financial system.

🎯 Exam Tip: Specific dates like establishment years are often tested, so ensure you memorize key historical facts accurately.

Question 3. Primary market is a Market where securities are traded in the
(a) First Time
(b) Second Time
(c) Three Time
(d) Several Times
Answer: (a) First Time
In simple words: The primary market is where new shares or bonds are sold to the public for the very first time. After this, they can be traded in the secondary market.

🎯 Exam Tip: Distinguish clearly between the primary market (new issues) and the secondary market (existing securities).

Question 4. Participants in the capital market includes
(a) Individuals
(b) Corporate
(c) Financial Institutions
(d) All of the options
Answer: (d) All of the options
In simple words: Many different types of people and groups take part in the capital market, including individuals, companies, and financial organizations. All these groups help the market work.

🎯 Exam Tip: A broad range of entities participate in the capital market to facilitate its complex operations. Knowing the key players is essential.

II. Very Short Answer Questions.

Question 1. What is Capital Market?
Answer: The capital market is a place where buyers and sellers trade financial securities like bonds and stocks, which are used for long-term investments. This market helps companies raise money for long-term projects and growth. Both individuals and institutions participate in these trades.
In simple words: A capital market is where long-term financial assets like shares and bonds are bought and sold. It connects people who have money with those who need it for a long time.

🎯 Exam Tip: Focus on "long-term financial securities" and the interaction between "buyers and sellers" as key definitions for the capital market.

Question 2. Write a note on OTCEI.
Answer: The OTCEI (Over The Counter Exchange of India) was created by financial institutions such as IDBI, IFCI, and SBI. Its purpose was to allow the buying and selling of securities electronically across India. This system brought transparency to transactions, made deals quicker, led to faster settlements, and improved the availability of cash in the market.
In simple words: OTCEI was an electronic system set up by banks to trade shares across the country. It made trading clear, fast, and easy to settle.

🎯 Exam Tip: Mentioning its establishment by financial institutions and its electronic, transparent, and quick trading features are crucial for a complete answer.

Question 3. What is Mutual Fund?
Answer: Mutual Funds are financial institutions that gather money from many small investors and then invest this pooled money into a variety of productive assets. This allows small investors to get the benefits of a diverse investment portfolio and earn reasonable returns, which they might not achieve on their own. The fund is managed by professionals who choose the best investments.
In simple words: A mutual fund collects money from many people and invests it in different places like stocks and bonds. This helps small investors earn money and spread out their risks.

🎯 Exam Tip: Key terms to include are "pooled funds from small investors," "diversified investment portfolio," and "reasonable return."

Question 4. Who are the participants in a Capital Market?
Answer: The capital market has many different participants. These include individual investors, large companies (corporate sector), the government, and various financial institutions like banks. Each of these participants plays a role in the flow of long-term funds.
In simple words: People, companies, the government, and banks all take part in the capital market. They buy and sell financial products there.

🎯 Exam Tip: Listing the main categories of participants—individuals, corporate, government, and financial institutions—shows a comprehensive understanding.

Question 5. How is price determined in a Capital Market?
Answer: In a capital market, the price of securities (like stocks and bonds) is decided by the forces of demand and supply. If many people want to buy a security (high demand) and there are few available (low supply), its price will go up. Conversely, if there's low demand and high supply, the price will fall. This interaction happens continuously in the market.
In simple words: The price of shares and bonds in the capital market is set by how many people want to buy them (demand) and how many are available to sell (supply).

🎯 Exam Tip: The core concept of price determination in any market, including the capital market, is always the interplay of demand and supply.

III. Short Answer Questions

Question 1. What are the various kinds of Capital Market? Explain.
Answer: The capital market primarily consists of two main kinds:
Primary Market: This is a market where new shares or financial claims are issued for the first time. It is also known as the New Issues Market (NIM) because it deals with securities that are released to the public for the very first time. This is how companies initially raise capital.
Secondary Market: This market handles previously issued (second-hand) securities. It's where investors buy and sell existing stocks and bonds among themselves. The secondary market includes both stock exchanges and the over-the-counter market, providing liquidity for investments.
In simple words: The capital market has two parts: the primary market, where new shares are sold first, and the secondary market, where old shares are traded between investors.

🎯 Exam Tip: Clearly differentiate between the "first-time issue" aspect of the primary market and the "trading of existing securities" in the secondary market.

Question 2. Explain any two functions of the Capital Market.
Answer: Here are two important functions of the Capital Market:
Ready and Continuous Market: The stock exchange, a part of the capital market, offers a central and convenient place. Here, buyers and sellers can easily trade securities, ensuring that there's always a market to buy or sell. This continuous availability helps maintain market liquidity.
A Reliable Guide to Performance: The capital market acts as a trustworthy indicator of a company's financial health and overall performance. The movement of stock prices and other financial positions of companies in the market reflect their efficiency and potential. Investors can use this information to make informed decisions.
In simple words: The capital market helps people buy and sell shares easily all the time. It also shows how well companies are doing, acting like a report card for their financial health.

🎯 Exam Tip: When explaining functions, use clear, descriptive headings and provide a concise explanation for each, highlighting their significance.

Question 3. Write a note on National Clearance and Depository System (NCDS).
Answer: The National Clearance and Depository System (NCDS) is a system for trading securities without physical documents. In this scriptless trading system, transactions are settled through book entries, meaning ownership changes are recorded electronically rather than by moving paper certificates. This comprehensive system is divided into three main parts:
1. The National Trade Comparison and Reporting System sets the rules for securities market contracts.
2. The National Clearing System determines how much cash and stock each broker needs to pay or receive on the settlement date.
3. The National Depository System handles the transfer of ownership of securities electronically, without any physical movement of transfer deeds, upon payment. This modernizes and simplifies the settlement process.
In simple words: NCDS is a system for trading shares without paper. It includes parts for setting trading rules, figuring out broker payments, and changing share ownership electronically.

🎯 Exam Tip: Emphasize the "scriptless trading system" and the three key segments (Trade Comparison, Clearing, Depository) that make up NCDS.

Question 4. Discuss evolution and growth of Indian Capital Market.
Answer: The Indian Capital Market has grown significantly over several periods:
* **1947-1973:** This period focused on building the basic infrastructure for the capital market. Key financial institutions like IFCI, ICICI, IDBI, UTI, SFCs, and SIDCs were established, which helped strengthen the market.
* **1980-1992:** During these years, debentures became a very effective tool for raising money in the primary market. Many new Stock Exchanges also came into existence, expanding the market's reach.
* **Post-1992:** This era saw immense growth in the secondary market. SEBI (Securities and Exchange Board of India) emerged as a strong regulatory body, providing protection to small investors and overseeing primary and secondary markets. New financial services, such as credit rating agencies, were also introduced, adding more sophistication to the market.
In simple words: The Indian capital market grew over time, first by building basic structures and setting up financial banks. Later, new ways to raise money like debentures became popular, and many stock exchanges opened. Finally, SEBI came in to protect investors and new financial services started.

🎯 Exam Tip: When discussing evolution, segment the timeline clearly and link specific developments (institutions, instruments, regulations) to each period.

Question 5. Explain about Factoring and Venture Capital Institutions.
Answer:
**Factoring:** Factoring is a financial service where a financial institution (a 'factor') buys a company's accounts receivable (money owed to it by customers) at a discount. The factor then takes responsibility for collecting these debts from the customers. This arrangement provides immediate cash to the company, improving its liquidity. In India, examples of factoring institutions include SBI Factors and Commercial Services Private Limited and Canbank Factors Limited.
**Venture Capital Institutions:** Venture capital financing involves providing equity funding specifically for new, innovative project ideas that have high growth potential but also high risk. Venture capital funds help these cutting-edge technology projects become commercially successful by converting ideas into marketable products. These institutions are vital for supporting entrepreneurial ventures.
In simple words: Factoring is when a bank buys a company's unpaid customer bills to give them quick cash. Venture capital is money given to new, risky, but promising businesses to help them grow and turn their ideas into real products.

🎯 Exam Tip: For factoring, emphasize buying 'accounts receivable' for 'immediate cash'. For venture capital, highlight 'equity financing' for 'new, innovative, high-risk projects'.

IV. Long Answer Questions:

Question 1. Discuss the characters of a Capital Market. (PM) (SPL)
Answer: The capital market has several distinct characteristics:
**Price:** The prices of securities in the capital market are determined by the fundamental economic principles of demand and supply. Constant interaction between buyers and sellers ensures that prices reflect market conditions.
**Market for Financial Assets:** The capital market functions as a platform specifically for trading long-term financial assets. These assets include shares, debentures, bonds, and other instruments that have a maturity period of more than one year.
**Securities Market:** Deals within the capital market primarily involve various types of securities, such as shares and debentures. This focus on securities is why it's often referred to as the securities market.
**Participants:** A diverse group of entities participates in the capital market. These include individuals (like small investors), corporate sectors (companies issuing or buying securities), the government, banks, and other financial institutions. Their collective activities drive the market.
**Location:** While not strictly confined to a single physical location, parts of the capital market are highly concentrated in well-known financial centers, particularly in stock exchanges. However, modern technology also enables widespread electronic trading.
In simple words: The capital market is a place where long-term financial assets like shares are traded. Their prices are set by demand and supply. Many different people and groups, like individuals, companies, and banks, take part. Even though trading happens electronically, some parts are still focused around main stock exchange locations.

🎯 Exam Tip: When describing characteristics, use clear sub-headings and explain each point concisely. Remember to emphasize the "long-term" nature of assets traded.

Question 2. Briefly explain the functions of capital market. FIRES
Answer: The capital market performs several crucial functions:
1. **Savings and Capital Formation:** It helps collect savings from various parts of the population, including individuals, companies, and the government. By offering reasonable returns and liquidity, it encourages people to invest in securities, which speeds up capital formation in the country. This money can then be used for productive investments.
2. **Permanent Capital:** The existence of a capital market allows companies to raise permanent capital even though individual investors might only want to invest for a limited time. This balance helps businesses fund their long-term needs.
3. **Industrial Growth:** The stock exchange serves as a central market that channels financial resources to the industrial sector of the economy. This flow of funds supports the expansion and development of industries.
4. **Ready and Continuous Market:** The stock exchange offers a central and convenient place for buyers and sellers to easily purchase and sell securities. This ensures that assets can be liquidated when needed, providing liquidity to investors.
5. **Reliable Guide to Performance:** The capital market acts as a trustworthy indicator of a company's performance and financial strength. Observing market trends and stock prices can help assess corporate efficiency and health.
6. **Proper Channelization of Funds:** The market prices and yields of securities guide investors to channel their funds towards companies that offer better prospects. This helps allocate capital efficiently to productive uses.
7. **Provision of Variety of Services:** Financial institutions within the capital market provide various services, such as long-term and medium-term loans, to entrepreneurs. This supports business ventures and economic activity.
8. **Development of Backward Areas:** Capital markets can provide funds for projects located in economically less developed regions. This helps boost economic development and create opportunities in these areas.
9. **Foreign Capital:** Capital markets enable Indian companies to attract funds from international markets through bonds and other securities. This inflow of foreign capital is essential for economic growth.
10. **Easy Liquidity:** The secondary market allows investors to easily sell their holdings and convert them into cash whenever they need it. This ease of conversion makes investments in securities more attractive.
In simple words: The capital market helps collect savings and turn them into investments for long-term growth. It helps companies get lasting money, boosts industry, and offers an easy place to trade shares. It also shows how well companies are doing, guides money to the best places, and provides many services. It supports growth in backward areas, attracts money from other countries, and makes it easy to turn investments into cash.

🎯 Exam Tip: When listing functions, aim to provide a brief explanation for each, clarifying how it contributes to the overall economy and market efficiency.

Question 3. Explain the various types of New Financial Institutions. (SON) (VN)
Answer: Several new financial institutions have been established to support the capital market:
**Stock Holding Corporation of India Limited [SHCIL]:** SHCIL acts as a central depository for securities, managing transactions on the stock exchange. It also handles the administrative clearing functions at a national level, ensuring smooth settlement processes.
**Over The Counter Exchange of India [OTCEI]:** Established by major financial institutions like IDBI, IFCI, and SBI, OTCEI was created to facilitate electronic trading of securities across the country. It aimed to provide a transparent and efficient platform for trading.
**National Securities Depositories Limited [NSDL]:** NSDL was set up to achieve timely dematerialization (converting physical shares to electronic form) and rematerialization (converting electronic shares back to physical form) of shares. It helps solve problems related to post-trade transactions in the secondary market, making trading safer and faster.
**Venture Capital Institution [VCI]:** Venture capital financing provides equity funding specifically designed for new and creative project ideas. Venture capital funds help bring high-technology projects into commercial production, supporting innovation and entrepreneurship. These institutions take on higher risks for potentially higher returns.
**National Stock Exchange of India [NSEI]:** NSEI was established in 1992 (though the source mentions 1942 in another context, 1992 is the widely accepted establishment year for modern NSE) to act as a model stock exchange. Its main goal is to provide a nationwide, electronic, screen-based "scripless" and "floorless" trading system for securities, revolutionizing stock trading in India.
In simple words: SHCIL manages stock transactions. OTCEI allows electronic trading all over the country. NSDL makes shares electronic and solves trading problems. Venture Capital funds help new, risky business ideas grow. NSEI offers a modern, screen-based system for trading shares across the nation.

🎯 Exam Tip: For each institution, identify its core purpose and one key function (e.g., SHCIL as depository, OTCEI for electronic trading, NSDL for dematerialization, VCI for funding innovative projects, NSEI for nationwide electronic trading).

12th Commerce Guide Capital Market Additional Important Questions and Answers

I. Choose the correct answer.

Question 1. The term _______ market refers to the facilities and institutional arrangement through long-term funds.
(a) Capital
(b) Asset
(c) Buyers
(d) Sellers
Answer: (a) Capital
In simple words: The "capital" market is where money is raised and invested for a long time, helping businesses grow and expand.

🎯 Exam Tip: Recognize "long-term funds" as the defining characteristic of the capital market.

Question 2. Channeling savings of small investors into productive investment is called
(a) Mutual Fund
(b) Bond
(c) Equity
(d) Stocks
Answer: (a) Mutual Fund
In simple words: When small savings are collected and invested to earn returns, it's typically done through a mutual fund.

🎯 Exam Tip: Mutual funds are specifically designed to aggregate small savings for diversified, productive investments.

Question 3. How to determine the price of the securities in the capital market
(a) Investment
(b) Savings
(c) Deposits
(d) Demand and Supply
Answer: (d) Demand and Supply
In simple words: Just like in any other market, the price of shares and bonds is decided by how many people want them (demand) and how many are available (supply).

🎯 Exam Tip: Always relate price determination back to the fundamental economic forces of demand and supply.

Question 4. NSEI was established in
(a) 1992
(b) 1991
(c) 1994
(d) 1995
Answer: (a) 1992
In simple words: The National Stock Exchange of India (NSEI) was created in 1992. This was a big change for stock trading in India.

🎯 Exam Tip: Memorize the establishment year of key financial institutions like NSEI.

Question 5. Primary Market facilitates.
(a) Capital formation
(b) Trade
(c) Funds
(d) Securities
Answer: (a) Capital formation
In simple words: The primary market helps businesses get new money by selling shares for the first time, which is known as capital formation.

🎯 Exam Tip: The main role of the primary market is to enable companies to raise fresh capital for their operations and expansion.

Question 6. The primary market is also called as
(a) Secondary market
(b) Commodity market
(c) Mutual funds
(d) New issues market
Answer: (d) New issues market
In simple words: Since the primary market is where new shares and bonds are first sold, it's also known as the "new issues market."

🎯 Exam Tip: Understand the alternative names for financial markets, as they often describe their primary function.

Question 7. The capital market is also known as
(a) Factoring
(b) Commodity market
(c) Securities Market
(d) Foreign Market
Answer: (c) Securities Market
In simple words: Because the capital market deals with buying and selling many different kinds of financial securities like stocks and bonds, it is often called the Securities Market.

🎯 Exam Tip: The term "securities" broadly covers the financial instruments (stocks, bonds) traded in the capital market.

Question 8. Pick the odd one out:
(a) Mutual Funds
(b) Venture Funds
(c) OTCEI
(d) Reserve Funds
Answer: (d) Reserve Funds
In simple words: Mutual funds, venture funds, and OTCEI are all types of financial services or institutions. "Reserve Funds" are internal company funds, not a type of market or institution like the others.

🎯 Exam Tip: To pick the odd one out, classify the options. Here, (a), (b), (c) are financial entities/markets, while (d) refers to a type of internal financial allocation.

Question 9. Which one is correctly matched?
(a) Foreign Exchange Market - All currencies
(b) Deviation Market - Indian Currency
(c) Hard Commodities Market - Iron and ore
(d) Soft Commodities Market - Coffee and Sugar
Answer: (b) Deviation Market - Indian Currency
In simple words: The "Deviation Market" is a term often used to refer to a specific segment within the Indian financial system that deals with Indian currency, differentiating it from global markets. The other options are not accurately matched.

🎯 Exam Tip: Pay close attention to specific market terminology and their correct associations, especially for regional markets.

Question 10. Which one is correctly matched?
(a) Venture Fund - Hi -technology projects
(b) Mutual Fund - Sale of account receivables.
(c) Factoring - Scripless and floorless
(d) NSEI - Savings of Small investors
Answer: (a) Venture Fund - Hi -technology projects
In simple words: Venture funds are mainly for investing in new, high-technology businesses that have high growth potential. The other options are mismatched in their definitions.

🎯 Exam Tip: Correctly associate each financial concept with its primary function or characteristic to avoid common mismatches.

Question 11. How many times security can be sold in a secondary market?
(a) Only One Time
(b) Two Time
(c) Three Times
(d) Multiple Times
Answer: (d) Multiple Times
In simple words: In the secondary market, shares and bonds can be bought and sold many times between different investors. There is no limit to how many times they can be traded.

🎯 Exam Tip: The secondary market's key feature is enabling continuous trading of existing securities, allowing for multiple transactions.

II. Match the following

Question 1. Match List I with List II

🎯 Exam Tip: Understand the primary function or identity of each financial institution/system to correctly match them. NSDL is for dematerialization, SHCIL is a corporation, NCDs handle clearing, and NSEI provides transparent trading.

III. Assertion and Reason

Question 1. Assertion (A): Government has liberalised FDI in the country. Reason (R): It brings foreign capital and technologies.
(a) (A) is true (R) is False.
(b) (A) is False (R) is True.
(c) Both (A) and (R) are true
(d) Both (A) and (R) are False
Answer: (c) Both (A) and (R) are true
In simple words: The government has opened up to more foreign investment, and the reason for this is that it helps bring in money and new technologies from other countries. Both statements are correct and the reason explains the assertion.

🎯 Exam Tip: In Assertion-Reason questions, first check if both statements are individually true. Then, check if the Reason logically explains the Assertion.

IV. Very Short Answer Questions.

Question 1. What is the Derivatives market?
Answer: The derivatives market helps in trading special financial tools like futures contracts and options. These tools are used to manage and reduce financial risks. Understanding how these instruments work can help protect investments from market swings.
In simple words: A derivatives market is where you trade financial tools like futures and options to control money risks.

🎯 Exam Tip: Remember that derivatives are mainly used for hedging (reducing risk) and speculation (taking a calculated risk for profit).

Question 2. What are the ways by which a company can raise capital in a primary market?
Answer: A company can raise money in the primary market in three main ways:
1. **Public Issue:** This is when a company offers its shares to the general public for the first time.
2. **Rights Issue:** Here, a company offers new shares to its existing shareholders, giving them a "right" to buy more shares.
3. **Private Placement:** In this method, a company sells its shares directly to a small group of selected investors, not the general public.
In simple words: Companies get money in the primary market by selling shares to everyone (public issue), only to current owners (rights issue), or to a few big investors (private placement).

🎯 Exam Tip: Distinguish between primary market (new issues) and secondary market (existing issues) when discussing capital raising methods.

Question 3. What are the methods of raising capital in a primary market by a company?
Answer: There are three main methods a company uses to gather money in the primary market:
1. **Public Issue:** A company offers new shares to the public for subscription, often through an Initial Public Offering (IPO).
2. **Rights Issue:** New shares are offered to existing shareholders in proportion to their current holdings, allowing them to maintain their ownership percentage.
3. **Private Placement:** Shares are sold to a select group of institutional investors or high net worth individuals, avoiding a broad public offering. This method is often faster and less costly than a public issue.
In simple words: Companies raise money in the primary market by selling shares to everyone (public issue), only to their current owners (rights issue), or to a few chosen big investors (private placement).

🎯 Exam Tip: Remember that a "primary market" is where new securities are sold for the very first time, helping companies get fresh capital.

Question 4. What is a Rights Issue?
Answer: A Rights Issue happens when a company needs to raise extra money by selling more shares. Instead of offering these new shares to everyone, the company first offers them to its current shareholders. These shares are offered in proportion to how many shares they already own. This lets existing shareholders keep their percentage of ownership in the company. For example, if a shareholder owns 10% of the company, a rights issue might allow them to buy new shares to still own 10% after the issue.
In simple words: A Rights Issue is when a company offers new shares for sale only to its existing shareholders, based on how many shares they already have.

🎯 Exam Tip: Note that a rights issue allows existing shareholders to prevent their ownership percentage from being diluted when new shares are issued.

Question 5. What is a private placement?
Answer: A private placement is a way for a company to sell its securities, like shares or bonds, directly to a small group of investors. These investors are usually big institutions or wealthy individuals, not the general public. It is a faster way to raise money compared to a public offering because it avoids many regulatory steps. This makes it a popular choice for companies seeking to raise capital quickly and efficiently from a limited number of investors.
In simple words: Private placement means selling shares to a small, specific group of investors instead of to everyone.

🎯 Exam Tip: Understand that private placements involve fewer regulatory requirements and are typically faster than public issues.

Question 6. Write a note on Foreign Exchange Market.
Answer: The Foreign Exchange Market, also known as the Forex market, is where different national currencies are traded. It is the biggest and most active financial market in the world, with over $5 trillion worth of currency exchanged every day. This market allows individuals, companies, and countries to convert one currency into another. It is crucial for international trade and investments, helping to set the exchange rates between currencies. The large volume of daily trading makes it extremely liquid, meaning currencies can be bought or sold easily.
In simple words: The Foreign Exchange Market is a huge worldwide market where different countries' money is bought and sold, helping with international trade.

🎯 Exam Tip: Remember that the foreign exchange market is vital for international transactions and is characterized by its immense liquidity.

Question 7. What is Deviative Market?
Answer: A Deviative Market, often referred to as a Derivatives Market, is a financial marketplace that allows the trading of special financial tools. These tools include things like futures contracts and options. Investors use these instruments to manage or reduce their financial risks, such as protecting against changes in prices or interest rates. They can also be used for speculation, where people try to profit from future price movements. This market plays a significant role in modern finance by offering various ways to handle market uncertainties.
In simple words: A Deviative Market (or Derivatives Market) trades tools like futures and options to help people control financial risks.

🎯 Exam Tip: The core purpose of a derivatives market is to provide tools for risk management and to allow for price discovery based on future expectations.