Introduction to

Financial Markets
NSQF LEVEL-II
STUDENT HANDBOOK (Class X)

`
CENTRAL BOARD OF SECONDARY EDUCATION
Shiksha Kendra, 2, Community Centre, Preet Vihar, Delhi-110301
 Introduction to
Financial Markets
NSQF LEVEL-II
STUDENT HANDBOOK (Class X)

CENTRAL BOARD OF SECONDARY EDUCATION

Shiksha Kendra, 2, Community Centre, Preet Vihar, Delhi-110301
Introduction to Financial Markets
(NSQF Level-II)

Student Handbook, Class X

Price: ` 45.00

First Edition: May 2016, CBSE

Copies: 5600

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iii
 THE CONSTITUTION OF INDIA
PREAMBLE
WE, THE PEOPLE OF INDIA, having solemnly resolved to constitute India into a 1SOVEREIGN
SOCIALIST SECULAR DEMOCRATIC REPUBLIC and to secure to all its citizens :
JUSTICE, social, economic and political;
LIBERTY of thought, expression, belief, faith and worship;
EQUALITY of status and of opportunity; and to promote among them all
FRATERNITY assuring the dignity of the individual and the2 unity and integrity of the Nation;
IN OUR CONSTITUENT ASSEMBLY this twenty-sixth day of November, 1949, do HEREBY ADOPT,
ENACT AND GIVE TO OURSELVES THIS CONSTITUTION.

1. Subs, by the Constitution (Forty-Second Amendment) Act. 1976, sec. 2, for "Sovereign Democratic Republic” (w.e.f. 3.1.1977)
2. Subs, by the Constitution (Forty-Second Amendment) Act. 1976, sec. 2, for "unity of the Nation” (w.e.f. 3.1.1977)

THE CONSTITUTION OF INDIA

Chapter IV A
FUNDAMENTAL DUTIES
ARTICLE 51A
Fundamental Duties - It shall be the duty of every citizen of India-
(a) to abide by the Constitution and respect its ideals and institutions, the National Flag and the National
Anthem;
(b) to cherish and follow the noble ideals which inspired our national struggle for freedom;
(c) to uphold and protect the sovereignty, unity and integrity of India;
(d) to defend the country and render national service when called upon to do so;
(e) to promote harmony and the spirit of common brotherhood amongst all the people of India transcending
religious, linguistic and regional or sectional diversities; to renounce practices derogatory to the dignity of
women;
(f) to value and preserve the rich heritage of our composite culture;
(g) to protect and improve the natural environment including forests, lakes, rivers, wild life and to have
compassion for living creatures;
(h) to develop the scientific temper, humanism and the spirit of inquiry and reform;
(i) to safeguard public property and to abjure violence;
(j) to strive towards excellence in all spheres of individual and collective activity so that the nation constantly
rises to higher levels of endeavour and achievement;
1
(k) to provide opportunities for education to his/her child or, as the case may be, ward between age of 6 and 14
years.

1. Subs. by the Constitution (Eighty - Sixth Amendment) Act, 2002

iv
 PREFACE
Ministry of Human Resource Development, Govt. of India is laying great
emphasis on skill and competency development. Accordingly, in future all
employment will be related to acquiring qualifications as per National Skill
Qualification Framework (NSQF). This is going to be a major game changer. The
NSQF will enable students in skill and competency development, provide for
vertical as well as horizontal mobility besides multiple entries and exits.
There is an acute shortage of trained professionals in BFSI (Banking, Financial
Services, and Insurance) industry. The National Skill Development Corporation
(NSDC) has identified BFSI as one of the 21 growth sector to develop skills.
NSE who is also the co-promoter of BFSI sector council and is responsible for
development of competency and skills in BFSI.
In view of the above, Board has introduced FMM from class IX onwards in
collaboration with National Stock Exchange (NSE) from academic session 2015-
16 onwards.
Students can study FMM course at 10+2 level. Students can also pursue
further studies as more than 16 universities are already offering BBA, MBA in
Financial Markets, who have collaborated with NSE.
The present book “Introduction to Financial Markets” for level 2 (Class-X)
broadly cover investment basics, securities, primary market, secondary market,
derivatives, depository, mutual funds, concepts and mode of analysis, ratio
analysis etc.
The Board takes this opportunity to thankfully acknowledge the commendable
work of NSE in providing content support to CBSE for successfully launching
and implementing FMM course under NSQF. NSE Learn to Trade (NLT)
software for skill development for students will help them to develop real life
market skills. The team at CBSE Vocational Education cell also deserve
appreciation for their contribution.
Comments and suggestions are welcome for further improvement of the Book.

Chairman, CBSE

v
 ACKNOWLEDGEMENTS

Advisors

Sh. Y.S.K. Seshu Kumar

Chairman, CBSE
Sh. K.K. Choudhury
Controller of Examinations & Director (V.E.), CBSE

Sh. Ravi Vasanasi

Chief Business Development, NSE
Mrs. Rana Usman
Sr. Assistant Vice President, NSE

Content Developed By
National Stock Exchange
Mumbai

Editing & Cordination

Dr. Biswajit Saha
Additional Director (V. E.), CBSE

Mr. G.C. Sharma

Head Financial Education, School and Universities of NSE

vi
 CONTENTS

Chapter 1 INVESTMENT BASICS 2

Chapter 2 SECURITIES 8

2.1 Regulator 8

2.2 Participants 9

Chapter 3 PRIMARY MARKET 11

3.1 Issue Of Shares 11

3.2 Foreign Capital Issuance 17

Chapter 4 SECONDARY MARKET 20

4.1 Introduction 20

4.1.1 Stock Exchange 20

4.1.2 Stock Trading 21

4.2 Products in the Secondary Markets 25

4.2.1 Equity Investment. 25

4.2.2. Debt Investment 28

Chapter 5 DERIVATIVES 31

Chapter 6 DEPOSITORY 34

vii
 CONTENTS

Chapter 7 MUTUAL FUNDS 37

Chapter 8 MISCELLANEOUS 44

8.1 Corporate Actions 44

8.2 Index 46

8.3 Clearing & Settlement and Redressal 46

Chapter 9 CONCEPTS & MODES OF ANALYSIS 50

Chapter 10 RATIO ANALYSIS 66

viii
Unit Code: 1 Unit Title: Investment Basics

Session-1 : Saving Vs Investment

Location: Learning Knowledge Performance Teaching and

Class Room, Outcome Evaluation Evaluation Training Method
FMM Lab,
Stock
Exchange Causes of
· Calculation of ·
· Formulate Interactive lecture:
Investment Investment Investment Situation to
Instruments Tool Calculation of the
Tools of
· Investment
Investment
Activity:
Needs of
· Calculate Bank and
Investment Post Office
Deposits.

Session-2 : Stock Exchange

Define Stock
· Tools to Invest ·
· Evaluate Interactive lecture:
Exchange in Stock each Equity, Risk and Return of
Exchange Debt Stock Market
Identify
· Derivative, Investment
National Stock Mutual Fund
Exchanges Activity:
Collection Market
Return Charts and
Sheets, Discuss

Session-3 : Electronic Shares

Find the
· Process of
· Fungibility
· Interactive lecture:
Depositories of Demateriali- to convert Discussing the
the Country. zation the share advantage of
from Demat Securities.
electronic to
physical Activity:
form Fill DRF (Demand
Request Form)

Introduction to Financial Markets 1

 Chapter 1
INVESTMENT BASICS
What is Investment?
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of
keeping the savings idle you may like to use savings in order to get return on it in the future.
This is called Investment.

Why should one invest?

One needs to invest to:
¦
earn return on your idle resources
¦
generate a specified sum of money for a specific goal in life
¦
make a provision for an uncertain future
One of the important reasons why one needs to invest wisely is to meet the cost of Inflation.
Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs
to buy the goods and services you need to live. Inflation causes money to lose value because it
will not buy the same amount of a good or a service in the future as it does now or did in the
past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today
would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any
long-term investment strategy. Remember to look at an investment’s ‘real’ rate of return, which is
the return after inflation. The aim of investments should be to provide a return above the
inflation rate to ensure that the investment does not decrease in value. For example, if the annual
inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in
value. If the after-tax return on your investment is less than the inflation rate, then your assets
have actually decreased in value; that is, they won’t buy as much today as they did last year.

When to start Investing?

The sooner one starts investing the better. By investing early you allow your investments more
time to grow, whereby the concept of compounding (as we shall see later) increases your income,
by accumulating the principal and the interest or dividend earned on it, year after year. The
three golden rules for all investors are:
¦
Invest early
¦
Invest regularly
¦
Invest for long term and not short term

What care should one take while investing?

Before making any investment, one must ensure to:
1. obtain written documents explaining the investment
2. read and understand such documents
3. verify the legitimacy of the investment

2
4. find out the costs and benefits associated with the investment
5. assess the risk-return profile of the investment
6. know the liquidity and safety aspects of the investment
7. ascertain if it is appropriate for your specific goals
8. compare these details with other investment opportunities available
9. examine if it fits in with other investments you are considering or you have already made
10. deal only through an authorised intermediary
11. seek all clarifications about the intermediary and the investment
12. explore the options available to you if something were to go wrong, and then, if satisfied,
make the investment.
These are called the Twelve Important Steps to Investing.

What is meant by Interest?

When we borrow money, we are expected to pay for using it - this is known as Interest. Interest
is an amount charged to the borrower for the privilege of using the lender’s money. Interest is
usually calculated as a percentage of the principal balance (the amount of money borrowed). The
percentage rate may be fixed for the life of the loan, or it may be variable, depending on the
terms of the loan.

What factors determine interest rates?

When we talk of interest rates, there are different types of interest rates -rates that banks offer to
their depositors, rates that they lend to their borrowers, the rate at which the Government
borrows in the Bond/Government Securities market, rates offered to investors in small savings
schemes like NSC, PPF, rates at which companies issue fixed deposits etc.
The factors which govern these interest rates are mostly economy related and are commonly
referred to as macroeconomic factors. Some of these factors are:
¦
Demand for money
¦
Level of Government borrowings
¦
Supply of money
¦
Inflation rate
¦
The Reserve Bank of India and the Government policies which determine some of the
variables mentioned above
What are various options available for investment?
One may invest in:
¦
Physical assets like real estate, gold/jewellery, commodities etc. and/or
¦
Financial assets such as fixed deposits with banks, small saving instruments with post
offices, insurance/provident/pension fund etc. or securities market related instruments like
shares, bonds, debentures etc.

Introduction to Financial Markets 3

 What are various short-term financial options available for investment?
Broadly speaking, savings bank account, money market/liquid funds and fixed deposits with
banks may be considered as short-term financial investment options:
Savings Bank Account is often the first banking product people use, which offers low interest
(4%-5% p.a.), making them only marginally better than fixed deposits.
Money Market or Liquid Funds are a specialized form of mutual funds that invest in extremely
short-term fixed income instruments and thereby provide easy liquidity. Unlike most mutual
funds, money market funds are primarily oriented towards protecting your capital and then, aim
to maximise returns. Money market funds usually yield better returns than savings accounts, but
lower than bank fixed deposits.
Fixed Deposits with Banks are also referred to as term deposits and minimum investment period
for bank FDs is 30 days. Fixed Deposits with banks are for investors with low risk appetite, and
may be considered for 6-12 months investment period as normally interest on less than 6
months bank FDs is likely to be lower than money market fund returns.
What are various long-term financial options available for investment?
Post Office Savings Schemes, Public Provident Fund, Company Fixed Deposits, Bonds and
Debentures, Mutual Funds etc.
Post Office Savings: Post Office Monthly Income Scheme is a low risk saving instrument, which
can be availed through any post office. It provides an interest rate of 8% per annum, which is
paid monthly. Minimum amount, which can be invested, is Rs. 1,000/- and additional
investment in multiples of 1,000/-. Maximum amount is Rs. 3,00,000/- (if Single) or Rs.
6,00,000/- (if held Jointly) during a year. It has a maturity period of 6 years. A bonus of 10% is
paid at the time of maturity. Premature withdrawal is permitted if deposit is more than one year
old. A deduction of 5% is levied from the principal amount if withdrawn prematurely; the 10%
bonus is also denied.
Public Provident Fund: A long term savings instrument with a maturity of 15 years and interest
payable at 8% per annum compounded annually. A PPF account can be opened through a
nationalized bank at anytime during the year and is open all through the year for depositing
money. Tax benefits can be availed for the amount invested and interest accrued is tax-free. A
withdrawal is permissible every year from the seventh financial year of the date of opening of
the account and the amount of withdrawal will be limited to 50% of the balance at credit at the
end of the 4th year immediately preceding the year in which the amount is withdrawn or at the
end of the preceding year whichever is lower the amount of loan if any.
Company Fixed Deposits: These are short-term (six months) to medium-term (three to five years)
borrowings by companies at a fixed rate of interest which is payable monthly, quarterly, semi-
annually or annually. They can also be cumulative fixed deposits where the entire principal
alongwith the interest is paid at the end of the loan period. The rate of interest varies between 6-
9% per annum for company FDs. The interest received is after deduction of taxes.
Bonds: It is a fixed income (debt) instrument issued for a period of more than one year with the
purpose of raising capital. The central or state government, corporations and similar institutions
sell bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest
on a specified date, called the Maturity Date.

4
Mutual Funds: These are funds operated by an investment company which raises money from
the public and invests in a group of assets (shares, debentures etc.), in accordance with a stated
set of objectives. It is a substitute for those who are unable to invest directly in equities or debt
because of resource, time or knowledge constraints. Benefits include professional money
management, buying in small amounts and diversification. Mutual fund units are issued and
redeemed by the Fund Management Company based on the fund’s net asset value (NAV), which
is determined at the end of each trading session. NAV is calculated as the value of all the shares
held by the fund, minus expenses, divided by the number of units issued. Mutual Funds are
usually long term investment vehicle though there some categories of mutual funds, such as
money market mutual funds which are short term instruments.
What is meant by a Stock Exchange?
The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘Stock Exchange’ as any body of
individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or
controlling the business of buying, selling or dealing in securities. Stock exchange could be a
regional stock exchange whose area of operation/jurisdiction is specified at the time of its
recognition or national exchanges, which are permitted to have nationwide trading since
inception. NSE was incorporated as a National Stock Exchange.
What is an ‘Equity’/Share?
Total equity capital of a company is divided into equal units of small denominations, each called
a share. For example, in a company the total equity capital of Rs 300,00,000 is divided into
20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then
is said to have 20,00,000 equity shares of Rs 10 each. The holders of such shares are members of
the company and have voting rights.
What is a ‘Debt Instrument’?
Debt instrument represents a contract whereby one party lends money to another on pre-
determined terms with regards to rate and periodicity of interest, repayment of principal amount
by the borrower to the lender.
In the Indian securities markets, the term bond’ is used for debt instruments issued by the
‘

Central and State governments and public sector organizations and the term debenture’ is used
for instruments issued by private corporate sector.
What is a Derivative?
Derivative is a product whose value is derived from the value of one or more basic variables,
called underlying. The underlying asset can be equity, index, foreign exchange (forex),
commodity or any other asset.
Derivative products initially emerged as hedging devices against fluctuations in commodity
prices and commodity-linked derivatives remained the sole form of such products for almost
three hundred years. The financial derivatives came into spotlight in post-1970 period due to
growing instability in the financial markets. However, since their emergence, these products
have become very popular and by 1990s, they accounted for about two-thirds of total
transactions in derivative products.

Introduction to Financial Markets 5

 What is a Mutual Fund?
A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of India)
that pools money from individuals/corporate investors and invests the same in a variety of
different financial instruments or securities such as equity shares, Government securities,
Bonds, debentures etc. Mutual funds can thus be considered as financial intermediaries in the
investment business that collect funds from the public and invest on behalf of the investors.
Mutual funds issue units to the investors. The appreciation of the portfolio or securities in which
the mutual fund has invested the money leads to an appreciation in the value of the units held
by investors. The investment objectives outlined by a Mutual fund in its prospectus are binding
on the Mutual Fund scheme. The investment objectives specify the class of securities a Mutual
Fund can invest in. Mutual Funds invest in various asset classes like equity, bonds, debentures,
commercial paper and government securities. The schemes offered by mutual funds vary from
fund to fund. Some are pure equity schemes; others are a mix of equity and bonds. Investors are
also given the option of getting dividends, which are declared periodically by the mutual fund,
or to participate only in the capital appreciation of the scheme.
What is an Index?
An Index shows how a specified portfolio of share prices are moving in order to give an
indication of market trends. It is a basket of securities and the average price movement of the
basket of securities indicates the index movement, whether upwards or downwards.
What is a Depository?
A depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds,
government securities, units etc.) in electronic form.
What is Dematerialization?
Dematerialization is the process by which physical certificates of an investor are converted to an
equivalent number of securities in electronic form and credited to the investor’s account with his
Depository Participant (DP).

6
Unit Code: 2 Unit Title: Securities

Session-1 : Securities Market

Location: Learning Knowledge Performance Teaching and

Class Room, Outcome Evaluation Evaluation Training Method
Business
Channels,
FMM Lab Who can
· Trading
· Steps to
· Interactive lecture:
invest Techniques Trade Brief about Market
Insecurities Basics Operations, Show
Market? Business Channels.
Market
·
Securities
· Behaviour Activity:
Platform Live Trading/Watch
Business Channels

Session-2 : Regulators

Need of
· Describe all
· Draw
· Interactive lecture:
Regulators Market Regulatory Scam in the
Regulators Securities Market
Role of SEBI
·
Activity:
Role Play of SEBI
Representative

Session-3 : Market Participants

Participant
· Name all the
· Role, Code of
· Interactive lecture:
Registration Market conduct for How to become
Participants the Market Participants.
Transaction
· Participants
through Activity:
Participants Role Play.

Introduction to Financial Markets 7

 Chapter 2
SECURITIES
What is meant by ‘Securities’?
The definition of ‘Securities’ as per the Securities Contracts Regulation Act (SCRA), 1956,
includes instruments such as shares, bonds, scrips, stocks or other marketable securities of
similar nature in or of any incorporate company or body corporate, government securities,
derivatives of securities, units of collective investment scheme, interest and rights in securities,
security receipt or any other instruments so declared by the Central Government.
What is the function of Securities Market?
Securities Markets is a place where buyers and sellers of securities can enter into transactions to
purchase and sell shares, bonds, debentures etc. Further, it performs an important role of
enabling corporates, entrepreneurs to raise resources for their companies and business ventures
through public issues. Transfer of resources from those having idle resources (investors) to
others who have a need for them (corporates) is most efficiently achieved through the securities
market. Stated formally, securities markets provide channels for reallocation of savings to
investments and entrepreneurship. Savings are linked to investments by a variety of
intermediaries, through a range of financial products, called ‘Securities’.
Which are the securities one can invest in?
¦Shares
¦Government Securities
¦Derivative products
¦Units of Mutual Funds etc., are some of the securities investors in the securities market
can invest in.

2.1 Regulator
Why does Securities Market need Regulators?
The absence of conditions of perfect competition in the securities market makes the role of the
Regulator extremely important. The regulator ensures that the market participants behave in a
desired manner so that securities market continues to be a major source of finance for corporate
and government and the interest of investors are protected.
Who regulates the Securities Market?
The responsibility for regulating the securities market is shared by Department of Economic
Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank of India (RBI) and Securities
and Exchange Board of India (SEBI).
What is SEBI and what is its role?
The Securities and Exchange Board of India (SEBI) is the regulatory authority in India
established under Section 3 of SEBI Act, 1992. SEBI Act, 1992 provides for establishment of

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Securities and Exchange Board of India (SEBI) with statutory powers for (a) protecting the
interests of investors in securities (b) promoting the development of the securities market and (c)
regulating the securities market. Its regulatory jurisdiction extends over corporates in the
issuance of capital and transfer of securities, in addition to all intermediaries and persons
associated with securities market. SEBI has been obligated to perform the aforesaid functions by
such measures as it thinks fit. In particular, it has powers for:
¦Regulating the business in stock exchanges and any other securities markets
¦Registering and regulating the working of stock brokers, sub-brokers etc.
¦Promoting and regulating self-regulatory organizations
¦Prohibiting fraudulent and unfair trade practices
¦Calling for information from, undertaking inspection, conducting inquiries and audits of
the stock exchanges, intermediaries, self-regulatory organizations, mutual funds and
other persons associated with the securities market.

2.2 Participants
Who are the participants in the Securities Market?
The securities market essentially has three categories of participants, namely, the issuers of
securities, investors in securities and the intermediaries, such as merchant bankers, brokers etc.
While the corporates and government raise resources from the securities market to meet their
obligations, it is households that invest their savings in the securities market.
Is it necessary to transact through an intermediary?
It is advisable to conduct transactions through an intermediary. For example you need to transact
through a trading member of a stock exchange if you intend to buy or sell any security on stock
exchanges. You need to maintain an account with a depository if you intend to hold securities in
demat form. You need to deposit money with a banker to an issue if you are subscribing to
public issues. You get guidance if you are transacting through an intermediary. Chose a SEBI
registered intermediary, as he is accountable for its activities. The list of registered
intermediaries is available with exchanges, industry associations etc.
What are the segments of Securities Market?
The securities market has two interdependent segments: the primary (new issues) market and
the secondary market. The primary market provides the channel for sale of new securities while
the secondary market deals in securities previously issued.

Introduction to Financial Markets 9