CBSE Class 12 Business Studies Financial Markets Worksheet Set A

Introduction
Financial Intermediation = process of allocating funds from saving surplus units (E.g. households) to saving deficit units (e.g. industries, government etc).
• Alternatives = Banks or Financial markets Financial Markets are the institutional arrangements by which savings generated in the economy are channelised into avenues of investment by industry, business and the government. It is a market for the creation and exchange of financial assets

Functions of Financial Market
1.Mobilization of savings and channelising them into the most productive uses:
• Facilitates transfer of savings from the savers to the investors.
• Financial markets help people to invest their savings in various financial instruments and earn income and capital appreciation. • Facilitate mobilization of savings of people and their channelisation into the most productive uses.

2. Facilitate Price Discovery:
• Price of anything depends upon the demand and supply factors.
• Demand and supply of financial assets and securities in financial markets help in deciding the prices of various financial securities; where business firms represent the demand and the households represent the supply.

3. Provide liquidity to financial assets:
• Financial markets provide liquidity to financial instruments by providing a ready market for the sale and purchase of financial assets.
• Whenever the investors want, they can invest their savings into long term investments and whenever they want, they can sell the investments/ instruments and convert them into cash.

4. Reduce the cost of transactions:
• By providing valuable information to buyers and sellers of financial assets, it helps to saves time, effort and money that would have been spent by them to find each other.
• Also investors can buy/sell securities through brokers who charge a nominal commission for their services. This way financial markets facilitate transactions at a very low cost.

Types of Financial Markets

Money Market

Market for financial securities with maturity period of less than one year.
• Mkt for low risk, unsecured and short term debt instruments that are highly liquid are traded everyday.
• No plysical location bye conducted over the telephone and the internet.
• Helps to:
o raise short term funds
o Temporary deployment of funds .

The main instruments of money market are as follows:

l. Treasure Bills: They are issued by the RBI on behalf of the Central Government to meet its short-term requirement of funds. They are issued at a price which is lower than their face value and arc repaid at par. They are available for a minimum amount of Rs.25000 and in multiples thereof. They are also known as Zero Coupon Bonds. They are negotiable instruments i.e. they are freely transferable.

2. Commercial Paper: It is a short term unsecured promissory note issued by large credit worthy companies to raise short term funds at lower rates of interest than market rates. They are negotiable instruments transferable by endorsement and delivery with a fixed maturity period of 15 days to one year.

3. Call Money: It is short term finance repayable on demand, with a maturity period of one day to 15 days, used for interbank transactions. Call Money is a method by which banks borrow from each other to be able to maintain the cash reserve ratio as per RBI. The interest rate paid on call money loans is known as the call rate.

4. Certificate of Deposit: It is an unsecured instrument issued in bearer form by Commercial Banks & Financial Institutions. They can be issued to individuals. Corporations and companies for raising money for a short period ranging from 91 days to one year.

5. Commercial Bill: It is a bill of exchange used to finance the working capital requirements of business firms. A seller of the goods draws the bill on the buyer when goods are sold on credit. When the bill is accepted by the buyer it becomes marketable instrument and is called a trade bill. These bills can be discounted with a bank if the seller needs funds before the bill maturity.

Call Money
• Call money is a short term money market instrument through which one bank may borrow money from another bank to maintain its cash reserve ratio as per the guidelines of RBI.
• It’s maturity period may range from a single day to a fortnight.
• The rate at which the interest is paid on call money is called call rate.

Commercial Paper
• Commercial Papers are the short term money market instrument issued by large and credit worthy companies.
• The instrument is in the form of an unsecured promissory note and is freely transferable by endorsement.
• Its maturity period may range from a fortnight to a year.
• It is sold at discount and redeemed at par.
• It is used for bridge financing.

Certificate of Deposit
• Certificate of deposit is a short term money market instrument issued by commercial banks and development financial institutions.
• It is an unsecured and negotiable instrument in bearer form.
• It may be issued to individuals, corporations and companies when banks need cash to meet credit needs

Treasury Bills
• Treasury bills are short term money market instrument which are issued by Reserve bank of India on behalf of the Government of India.
• They are issued in the form of promissory notes and are very safe instruments.
• They are sold at discount and redeemed at par.
• They are also known as zero-coupon-discount bonds.
• The minimum value of their purchase is ? 25,000 and in multiples thereof.

Commercial Bill
• Commercial bill is a short term money market instrument.
• A business firm may draw a bill of exchange in favour of another in lieu of credit purchases.
• On acceptance by the drawee (buyer) it becomes a trade bill.
• When the trade bill is accepted by a commercial-bank for discounting it is called commercial bill.
• A bill of exchange is a freely negotiable instrument.
• It is usually drawn for a period of 3 months.

Capital Market
Facilities and institutional arrangements through which long term securities are raised and invested- both debt and equity.

• Nature of Capital Markets:
a. Important component of Financial markets
b. Two segments(primary and secondary)
c. 2 forms(organized and unorganized)
d. long term securities
e. Satisfies long term requirements of funds
f. Performs trade-off functions
g. Creates dispersion in business ownership
h. Helps in capital formation
i. Creates liquidity

• Features Of Capital Market Instruments:
a. Provide long term funds
b. Lesser outlay required as unit value of instruments is low
c. Duration more than 1 year
d. Liquidity
e. Lower safety
f. Higher expected returns as compared to short term securities

The capital market can be divided into two parts:
1. Primary Market
2. Secondary Market

Primary Market
• New issues markets
• Transfers investible funds from savers to entrepreneurs.
• Funds used for setting up new projects, expansion, diversification, modernization of existing projects, mergers and take overs etc.

Methods of Floatation of New Issues in Primary Market
1. Offer through Prospectus: It involves inviting subscription from the public through issue of prospectus. A prospectus makes a direct appeal to investors to raise capital through an advertisement in newspapers and magazines.
2. Offer for Sale: Under this method, securities are offered for sale through intermediaries like issuing houses or stock brokers. The company sells securities to intermediary/broker at an agreed price and the broker resells them to investors at a higher price.
3. Private Placements: It refers to the process in which securities are allotted to institutional investor and some selected individuals.
4. Rights Issue: It refers to the issue in which new shares are offered to the existing shareholders in proportion to the number of shares they already possess.
5. e-IPOs: It is a method of issuing securities through an on-line system of stock exchange. A company proposing to issue capital to the public through the on-line system of the stock exchange has to enter into an agreement with the stock exchange. This is called an e-initial public offer. SEBI’s registered brokers have to be appointed for the purpose of accepting applications and placing orders with the company.

Secondary Market
1.Refers to a market where existing securities are bought and sold.
2.The company is not involved in the transaction at all. It is between two investors.

Features of Secondary market are:
1) Creates liquidity
2) Fixed location
3) Comes after primary market
4) Encourages new investment

Difference between Primary Market and Secondary Market

Stock Exchange/Share Market

A Stock Exchange is an institution which provides a platform for buying and selling of existing securities. It facilitates the exchange of a security i.e. share, debenture etc. into money and vice versa.

Following are some of the important functions of a Stock Exchange:
a. Gives liquidity and marketability to existing securities
b. Pricing of securities(dd and ss)
c. Safety of transactions(membership = regulated + dealings well defined)
d. Contributes to economic growth (ensures that savings are channelized to most productive investment avenues)
e. Spreading of equity cult(ensures wider share ownership)
f. Provides scope for speculation (in a restricted and controlled environment)

Trading Procedure on a Stock Exchange
1. Selection of Broker: in order to trade on a Stock Exchange first a broker is selected who should be a member of stock exchange as they can only trade on the stock exchange.
2. Placing the order: After selecting a broker, the investors specify the type and number of securities they want to buy or sell.
3. Executing the order: The broker will buy or sell the securities as per the instructions of the investor.
4. Settlement: Transactions on a stock exchange may be carried out on either cash basis or carry over basis (i.e. badla). The time period for which the transactions are carried forward is referred to as accounts which vary from a fortnight to a month. All transactions made during one account are to be settled by payment for purchases and by delivery of share certificates, which is a proof of ownership of securities by an individual. Earlier trading on a stock exchange took place through a public outcry or auction system which is now replaced by an online screen based electronic trading system. Moreover, to eliminate, the problems of theft, forgery, transfer, delays etc. an electronic book entry from a holding and transferring securities has been introduced, which is called process of de materialisation of securities.

Difference between Capital and Money Market

Depository Services and DEMAT Accounts: Keeping in the mind the difficulties to transfer of shares in physical form, SEBI has developed a new system in which trading in shares is made compulsory in electronic form Depository services system and D-Mat Account are very basis of this system.

Depository Services: Just like a bank keeps money in safe custody for customers, a depository also is like a bank and keeps securities(e.g. shares, debentures, bonds, mutual funds etc.) in electronic form on behalf of the investor. In the depository a securities account can be opened, all shares can be deposited, they can be withdrawn/ sold at any time and instruction to deliver or receive shares on behalf of the investor can be given. At present there are two depositories in India: NSDL. (National Securities Depository Ltd.) and CDSL (Central Depository Services Ltd.). which are known as “Depository Participants”. (DPs)

Services provided by Depository
Dematerialisation (usually known as demat) is converting physical certificates to electronic form. Rematerialisation, known as remat, is reverse of demat, i.e getting physical certificates from the electronic securities.
Transfer of securities, change of beneficial ownership.
Settlement of trades done on exchange connected to the Depository. Now a days on-line paper-less trading in shares of the company is compulsory in India. Depository services is the name of that mechanism. In this system transfer of ownership in shares take place by means of book entry without the physical delivery of shares. When an investor wants to deal in shares of any company he has to open a Demat account.

There are four players who participate in this system.
1. The Depository: A depository is an institution which holds the shares of an investor in electronic form. There are two depository institutions in India these are NSDL and CDSL.
2. The Depository Participant: He opens the account of Investor and maintains securities records.
3. The Investor: He is a person who wants to deal in shares whose name is recorded
4. The Issuing Company: That organization which issues the securities. This issuing company sends a list of the shareholders to the depositories.

Benefits of Depository Services
• Sale and Purchase of shares and stocks of any company on any stock Exchange.
• Saves time.
• Lower transaction costs
• Ease in trading.
• Transparency in transactions.
• No counterfeiting of security certificate
• Physical presence of investor is not required in stock exchange.
• Risk of mutilation and loss of security certificate is eliminated.

Demat Account
Demat (Dematerialized) account refers to an account which an Indian citizen must open with the depository participant (banks, stockbrokers) to trade in listed securities in electronic form. The securities are held in the electronic form by a depository.

Securities and Exchange Board of India (SEBI)
SEBI was established by Government of India on 12 April 1988 as an interim administrative body to promote orderly and healthy growth of securities market and for investor protection. It was given a statutory status on 30 January1992 through an ordinance which was later replaced by an Act of Parliament known as the SEBI Act, 1992. It seeks to protect the interest of investors in new and second hand securities.

Objectives of SEBI
1. To regulate stock exchange and the securities market to promote their orderly functioning.
2. To protect the rights and interests of investors and to guide & educate them.
3. To prevent trade mal practices such as internal trading.
4. To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers etc.

Functions of SEBI

1. Protective Functions :
a) Prohibit fraudulent & unfair trade practices in secondary market (e.g. Price rigging & misleading statement) .
b) Prohibit insider trading.
c) Educate investors Promote fair practice & code of conduct in securities market

2.Development Functions :
a) Promotes training of intermediaries of the securities market .
b) Investor education c) Promotion of fair practices code of conduct of all SRO‘s.
d) Conducting research & publish information useful to all market participants

3. Regulation Functions :
a) Registration of brokers and sub brokers & other players in the mkt.
b) Registration of collective investment schemes & mutual funds.
c) Regulation of stock bankers & portfolio exchanges & merchant bankers.

very short Question answer

Question. Name the kind of issue in which shares are offered to existing shareholder.
Answer : Right Issue.

Question. Give example of any two financial intermediaries. 
Answer : a) Banks. b) Financial markets.

Question. give examples of any two money market instruments.
Answer : a) Commercial Paper. B) Call Money.

Question. what was the traditional system of trading on a stock exchange?
Answer : Outcry or auction system

Question. What are the two basis on which transactions on a stock exchange may be carried out?
Answer : Cash basis or Carry over basis.

Question. Give names of any two places where regional offices of SEBI is located.
Answer : a) Chennai b) Delhi

Question. the director of a newly established company having paid up equity share capital of 25 crores desire to get its shares traded at all India Level Stock exchange. As finance Manager of the company, Suggest the name of stock exchange for the purpose. Give any 3 reasons in support of your answer.
Answer : The company should get its share listed at OTCEI. The main features of OTCEL are the following-
1) Nation-wide listing, Listing on one exchange one can have transactions with all the counters in the whole country.
2) Exclusive list of companies, on the OTCEL only those companies are listed whose issued capital is 30 Lakh or more.
3) Investor’s registration- All the investor doing transactions on the OTCEL have got to register themselves compulsorily.
4) Transparency in transactions- All the transactions are done in the presence of the investor. The rates of buying and selling can be seen on the computer screen.

Question. “Securities and exchange Board of India (SEBI) is the watchdog of the securities market.” Do you agree ? Give four reasons in support of your answer.
Answer : 1) regulatory functions of SEBI.

Question. The director of a company want to modernize its plants and machinery by making a public issue of Shares. They wish to approach stock exchange, while the finance manager prefers to approach a consultant for the new public issue of shares. Advice the directors whether to approach stock exchange ro a consultant for new public issue of shares and why? Also advise about the different methods which the company may adopt for the new public issue of shares.
Answer :  the directors should approach the consultant for the new public issue of shares as the company wish to make new public issue of shares to modernize its plants and machinery.
Following are the methods which the company may adopt for the new public issue of shares:
i) Right Issue: Since it appears from the question that the company is an existing company as it wants to modernize its plant and machinery, the company by statute is required to offer these shares first to the existing shareholders in proportion to their holdings. If the existing shareholders do not take these shares then company can resort to other methods as given below.
ii) Public Offer through Prospectus: Under this method, the company can directly offer its shares to the public at large after issuing prospectus.
iii) Offer for sale: In this case, an intermediary buys all the shares from the company at agreed price and offers it to the investors at a higher rate.
iv) Private Placement: In this case also an intermediary buys the shares from the company but offers it to only a selected few for sale.

Question. the directors of a newly established company having a paid up equity share capital of Rs 25 crores, desire to get its shares traded at an all India level stock exchange. As finance manager of the company, suggest the name of the stock exchange for the purpose. Give any 3 reasons in support of your answer.
Answer : In the given situation, I would recommend the shares of the company to be listed at the outlet the counter exchange of India(OTCEI). The reasons are:
i) In the OTCEI, there is an existence of compulsory market makers(banks/financial institutions) that buys/sells securities of the selected companies which improves the liquidity of the securities.
ii) The Company has a paid-up share capital of less than Rs3 crores.
iii) Less stringent conditions are applicable for listing of the securities as compared to those applicable for listing in National Stock exchange of India.

Important Questions for NCERT Class 12 Business Studies Financial Markets

Question. Which instrument of money market is also called zero coupon bond?
(a) Call money
(b) Commercial Paper
(c) Certificate of Deposit
(d) Treasury Bill

Answer  :  D

Question. An ideal Capital market is one-
(a) Where finance is available at higher cost.
(b) Must provide insufficient information to investors.
(c) Where market operations are inconsistent.
(d) Which facilitatis e-conomic growth.

Answer : D

Question. Which market directly contributes for capital formation and increase in capital of firms?
(a) Primary market
(b) Secondary market
(c) Both (a) and (b)
(d) None of the above

Answer :  A

Question. The duration of money market instruments are
(a) Upto one year
(b) Upto three years
(c) Upto five years
(d) Upto ten years

Answer :  A

Question. Under Private Placement, shares are never offered to
(a) Institutes
(b) Brokers
(c) General Public
(d) None of the above

Answer :  C

Question. Under secondary market, sale of securities take place between
(a) Company and Investors
(b) Company and Company
(c) Investor and other investor
(d) None of the above

Answer :  C

Question. In Right Issue, shares are issued to
(a) General public
(b) Existing shareholders
(c) Institutes only
(d) None of the above

Answer :  B

Question. If a company is already in liquidity crunch and flotation costs of the issue would be high. What kind of instrument will be appoints for the money market.
(a) Commercial Bills
(b) Commercial paper
(c) Treasury Bill
(d) COD

Answer : B

Question. Dinesh has 100 equity shares of a company. He wants to sell 500 of these shares. Which market should be approach?
(a) Secondary market
(b) Primary market
(c) Financial market
(d) Money market

Answer : A

Question. The economic condition of every country is reflected by dealings in
(a) Stock Market
(b) Money Market
(c) Primary Market
(d) None of the above

Answer :  A

Question. The Apex Body who controls the Capital Market of our country is
(a) RBI
(b) SBI
(c) SEBI
(d) None of the above

Answer :  C

Question. SEBI protects the interest of
(a) Investor
(b) Companies
(c) Brokers
(d) None of the above

Answer :  A

Question. Full form of e-IPOs-
(a) Electronic internet Public Offer
(b) Electronic Initial Private Offer
(c) Electronic Initial Prospectus Offer
(d) Electronic Initial Public Offer
Answer : D

Question. Which of the following is not a function of SEBI?
(a) Registration of brokers and sub-brokers
(b) Undertaking measures to develop finanical markets
(c) Prohibition of insider trading
(d) Holding securities in electronic form.

Answer : D

Question. Instruments with a maturity period of less than one year are traded in the ................... .
(a) capital market
(b) Bombay stock exchange
(c) money market
(d) National stock exchange

Answer : B

Question. is the full form of CDSL.
(a) Central Depository Securities Ltd.
(b) Control Delhi Services Ltd.
(c) Central Deposit Services Ltd.
(d) Central Depository Services Limited.

Answer : D

Question. In which year was the SEBI established by the Government of India?
(a) 1980
(b) 1988
(c) 1992
(d) 1993

Answer : B

Question. Which of the following money market instruments are also known as zero coupon bond?
(a) Treasury bills
(b) Certificates of deposits
(c) Commercial papers
(d) Call money

Answer : A

Question. Hari has 200 shares of Reliance industries. Reliance comes out with a fresh issue of share and Hari received an offer to buy 1 more share of Reliance for every two shares held by him. Which type of issue is discussed here:
(a) e-IPO’s
(b) Rights issue
(c) Private placement
(d) Offer for sale

Answer : C

Question. Primary and secondary markets ....................... .
(b) Compete with each other
(c) Complement each other
(d) Function independently
(e) Control each other.

Answer : B

Fill in the blanks :

Question. is short term finance used for inter bank transactions.

Answer : Call money

Question. is an institution which provides a platform for buying and selling of existing securities.

Answer : Stock exchange

Question. Treasury bills are available for a minimum amount of ................. and in multiples there of.

Answer : 25,000

Question. In India, there are ......................... depositories.

Answer : two

Question. is a market for the creation and exchange of financial assets. 

Answer : Financial market

True or False :

1. Capital market deals only with common stock and other equity securities. True

2. The participants in the capital market RBI, finance companies. False

3. Financial market not help in reducing the cost of transactions. False

4. Capital market instruments are riskier both with respect to return and principal repayment. True

5. Commercial paper is a secured promissory note. True

6. Sensex is made up of 30 of the most actively traded stocks in the market . True

7. BSE does not have a nation – wide presence .

8. BSE has the target market capitalization in India . True

9. Debt market segment provides platform for fixed Income Securities . True

10. Capital market segment provides platform for fixed Income Securities . False

11. The process of holding securities in an electronic form is called Dematerlisation . True

12. To trade in securities Demate Account is not necessary. False

13. IPOs can be issued by companies in paper mode only. False

14. Demate account is opened with depository participants . True

15. Investor can trade directly with Stock Exchange . False

Key points to remember for Chapter 10 Financial Markets

• Functions of the Financial Markets :
(i) Facilitates price discovery : Price is determined where demand and supply of funds intersect.
(ii) Mobilisation of savings and channelising them into the most productive use : Facilitates transfer of savings from the savers to the investors.
(iii) Provides liquidity to financial assets : Facilitates easy purchase and sale of financial assets.
(iv) Reducing the cost of transaction : Save time, effort and money by providing valuable information about securities.

• Types of Financial Markets :
(i) Money Market;
(ii) Capital Market.

• Money market : Market for short term funds and securities having maturity upto one year.

• Types of money market instruments : Following are the money market instruments :
(i) Commercial paper :
(a) Issued by the large and credit worthy companies.
(b) Maturity period is 15 days to 1 year.
(c) Usually, issued at discount and redeemed at par.
(d) Used for bridge financing.

(ii) Call money :
(a) A bank borrows call money from other bank.
(b) Used to maintain cash reserve ratio.
(c) Maturity period is from 1 day to 15 days.

(iii) Certificate of deposit :
(a) Issued by the commercial banks and the financial institutions.
(b) Used to meet high demand for credit.
(iv) Commercial bill :
(a) Issued by firms to meet working capital requirements.
(b) Trade bill, when accepted by bank, becomes commercial bill.
(v) Treasury bill :
(a) Issued by RBI on behalf of the Government of India.
(b) Issued at discount and redeemed at par.
(c) Maturity period is from 14 days to 364 days.
(d) Also called Zero Coupon Bonds.

• Capital Market : It refers to whole market of organisations institutions through which medium and long-term funds; both debt and equity are raised and invested.

• Components of Capital Market :
(i) Primary Market : It refers to the market wherein securities (shares, debentures) are sold for the first time. It is also known as new issue market. The various methods of floatation are :
(a) Offer through prospectus : Company invites subscription from public through the issue of prospectus by advertising in newspapers and magazines.
(b) Offer for sale : Securities are offered for sale through intermediaries like stock brokers, banks, etc.
(c) Private placement : Company allots securities to the institutional investors and to the selected individuals.
(d) Right issue : Company offers its existing shareholders to buy new shares in proportion to their existing shares.
(e) e-IPOs : Company issues securities to public through the online system of the stock exchange.
(ii) Secondary Market : It refers to the market for sale and purchase of previously issued securities. It is also known as stock exchange.

• Functions of a Stock Exchange :
(i) Provides liquidity and marketability to existing securities.
(ii) Ensures safety of transactions.
(iii) Contributes to economic growth.
(iv) Spreads out equity cult.
(v) Determines price of securities.
(vi) Provides scope for speculation.

• Trading Procedure on a Stock Exchange :
(i) Selecting a broker.
(ii) Opening a demat account.
(iii) Placing an order.
(iv) Executing the order.
(v) Settlement of transaction.

• Securities and Exchange Board of India (SEBI) : It was established by the Indian Government in 1988 under the administrative control of the Ministry of Finance, Government of India. Later, it became a statutory body under the SEBI Act, 1992.

• Objectives of SEBI :
(i) To regulate stock exchanges.
(ii) To protect investor’s rights and interests.
(iii) To prevent trading malpractices.
(iv) To develop the code of conduct.

Ø Functions of the SEBI : I. Regulatory Functions :
(i) Registration of players in the market.
(ii) Registration of investment schemes.
(iii) Regulation of intermediaries.
(iv) Regulation of takeover bids.
(v) Calling for information.
(vi) Levying fees.
(vii) Others as delegated by the Govt. of India.

II. Developmental Functions :
(i) Training of intermediaries.
(ii) Conducting research.
(iii) Developing capital markets.

III. Protective Functions :
(i) Prohibition of unfair trade practices.
(ii) Controlling insider trading.
(iii) Investors’ protection.
(iv) Promotion of fair practices and code of conduct. 

• Depository services :
(i) Opening a demat account.
(ii) De-materialisation.
(iii) Re-materialisation.
(iv) Record of securities.
(v) Settlement of transactions.
(vi) Facilitating loan against the securities.
(vii) Freezing demat account.

• Players in depository system :
(i) Depository.
(ii) Depository participant.
(iii) Beneficial owner.
(iv) Issuer.