Solution

FINANCIAL MARKETS

Class 12 - Business Studies

1. a. Dematerialisation is the process of converting physical shares into electronic format. An investor who wants to dematerialise
his shares needs to open a demat account with Depository Participant. Investor surrenders his physical shares and in turn gets
electronic shares in his demat account. Dematerialisation refers to the process of holding securities in electronic form.
b. The two problems of holding shares in physical form are as follows:
i. When the shares certificates are held in physical form, there is danger of loss or theft.
ii. There is risk of forgery, as the buyer may be delivered fake certificates.
2. i. Commercial bill: A commercial bill is a bill of exchange used to finance the working capital requirements of business firms.
It is a short-term negotiable, self liquidating instrument, which is used to finance the credit sale of the firms When goods are
sold on credit, seller draws the bill of exchange on the buyer On being accepted by the buyer, it becomes a trade bill, which is
a marketable instrument On being discounted from the bank, the trade bill becomes the commercial bill.
ii. Certificate of deposit: A certificate of deposit (CD) is a savings certificate with a fixed maturity date and specified fixed

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interest rate that can be issued in any denomination aside from minimum investment requirements. A CD restricts access to
the funds until the maturity date of the investment.

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3. i. Co-partnership
ii. Stock exchange

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iii. According to the changes in the market price, share can be sold at any time.
It helps in converting an investment into cash and vice versa.
4. Treasury bills (T-bills) offer short-term investment opportunities, generally up to one year. They are thus useful in managing short-
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term liquidity. At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day
and 364-day. There are no treasury bills issued by State Governments. Treasury bills are available for a minimum amount of
Rs.25,000 and in multiples of Rs. 25,000. Treasury bills are issued at a discount and are redeemed at par. Treasury bills are also
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issued under the Market Stabilization Scheme (MSS).Objective of issuing T-Bills is to fulfill the short term money borrowing
needs of the government. T-bills have an advantage over the other bills such as:
Zero Risk weightage associated with them. They are issued by the government and sovereign papers have zero risk assigned to
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them, High liquidity because 91 days and 36 days are short term maturity.
5. The primary market is where securities are created, while the secondary market is where those securities are traded by
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investors.
​Offer for Sale: Under this method, securities are not issued directly to the public but are offered for sale through intermediaries
like issuing houses or stockbrokers. In this case, a company sells securities embolic at an agreed price to brokers who, in turn,
resell them to the investing public.
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6. Functions of stock exchange are:

i. Contributes to Economic Growth.
ii. Providing Liquidity and Marketability to Existing Securities
iii. Pricing of Securities
iv. Safety of Transaction
v. Spreading of Equity Cult
vi. Providing Scope for Speculation
vii. A stock exchange is also a reliable barometer to measure the economic condition of a country.
7. a. The step of trading procedure in a stock exchange which has not been followed by "Unicon Securities Pvt. Ltd" is settlement
i.e. the delivery of shares through the D'mat Account of the broker to D'mat account of the investors.
b. The Securities and Exchange Board of India (SEBI) is the Apex statutory body of capital market to whom customer can
complain to redress their grievances.
c. Money market js a market for short term funds meant for dealing in monetary assets whose period of maturity is less than one
year. Features of money market are
i. Market for short term
ii. No fixed geographical location
iii. Major institutions involved in money market are RBI Commercial Banks, LIC, GIC etc.

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 iv. Common instruments of money market are call money, treasury bill, CP, CD, commercial bill etc.
8. Mr. Gupta should approach the primary market.
Following are the features of the primary market:
i. The primary market is the market where the securities are sold for the first time. New security certificates are issued to
investors.
ii. Securities are issued by the company directly to the investors.
iii. Money raised by the companies through the primary market is available for a very long period.
9. A capital market is a financial market in which long-term debt or equity-based securities are bought and sold. Capital markets
channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-
term investments.
The two types of capital market are:
i. Primary market or new issue market (NIM)
ii. Secondary market or stock exchange
10. Financial markets are the markets which transfer money capital or financial resources from savers to the entrepreneurial
borrowers. Financial markets are crucial links in the saving-investment process. Thus, financial markets bring together borrowers
and lenders.

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The following are two major segments of financial markets:

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i. Capital market.
ii. Money market.
The capital market is the market for medium and long-term funds.

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The money market is the market for short-term funds.
11. SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries such as merchant bankers, brokers,
underwriters, etc.
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12. A primary market issues new securities on an exchange for companies, governments and other groups to obtain financing through
debt-based or equity-based securities. Primary market means that market wherein securities are sold for the first time. A primary
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market plays important role in transferring funds from the investors to the entrepreneurs. A business firm can raise funds from this
market through equity shares, preference shares, debentures and loans and deposits. Funds raised by an entrepreneur through
primary market can be used for setting up a new project, diversification, modernisation of existing business and mergers and
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takeovers etc.
13. a. Screen-based trading refers to the process of buying or selling securities online.In other words it is a form of trading that uses
modern telecommunication and computer technology to combine information transmission with trading in financial markets.
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b. Dematerialisation refers to the process of holding securities in electronic form. The two advantages of Dematerialisation are as
follows:
i. The securities in the demat account can be offered as security to raise loans.
ii. Since the shares certificates are not held in physical form, there is no danger of loss, theft or forgery.
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14. Main functions of financial market are:

i. Providing Liquidity to Financial Assets.
ii. Mobilisation of Savings and channelling them into the most Productive Uses
iii. Facilitating Price Discovery
iv. Financial markets reduce transaction costs and information costs.
15. The function given is one of the regulatory functions of SEBI. The other two functions in the same category are as follows:
i. Registration of brokers and sub-brokers and other players in the market.
ii. Regulation of stock brokers, portfolio exchanges, underwriters and merchant bankers and the business in stock exchanges and
any other securities market.
16. This is true that SEBI is the watchdog of the securities market. As a watchdog of securities market, SEBI performs the following
protective functions:
i. To control the insider trading and to impose penalties for such practices.
ii. To protect the capital market from manipulations, price rigging and misleading statements.
iii. To protect the investors.
iv. To conduct inquiries and audit of stock exchanges.

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17. After the trade has been executed, within 24 hours the broker issues a Contract Note. This note contains details of the number of
shares bought or sold, the price, the date and time of deal, and the brokerage charges. This is an important document as it is legally
enforceable and helps to settle disputes/claims between the investor and the broker. A Unique Order Code number is assigned to
each transaction by the stock exchange and is printed on the contract note.
18. A stock exchange provides a platform for disinvestment and reinvestment of savings into most productive avenues. Thus it leads
to economic growth.
However, stock exchange performs following functions
i. Provides liquidity and marketability of existing securities: Stock exchange provides a ready and continuous market where
securities are bought and sold. It gives investors the chance to disinvest or reinvest. Thus, regular dealing provides both
liquidity and marketability to existing securities.
ii. Safety of transaction: The stock exchange is well regulated and its dealings are well defined according to the existing legal
framework. This ensures that the investing public gets a safe and fair deal in the market.
iii. Pricing of securities: The stock exchange helps in determining the prices of various securities that reflect their real worth. It
enables correct pricing of securities through the interplay of demand and supply.
19. a. Call money is the instrument used by 'Subh Bank' to meet its short term requirements of funds. Call money is money loaned
by a bank that must be repaid on demand. Unlike a term loan, which has a set maturity and payment schedule, call money does

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not have to follow a fixed schedule, nor does the lender have to provide any notice of repayment.
b. Three features of call money are as follows:

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i. Call money is an instrument through which one bank may borrow money from another bank to maintain the cash reserve
ratio as per the guidelines of RBI.

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ii. Its maturity period may be from a single day to a fortnight.
iii. The rate at which the interest is paid on call money is called call rate.
20. a. Ekta should approach the secondary market i.e. stock exchange because she wants to sell existing securities held by her.
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b. Following are the advantages of selling through the stock exchange:
i. A stock exchange provides a ready market for securities. People can sell the securities at their convenience.
ii. Stock exchange provides a fair price for securities.
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iii. Stock exchange ensures the safety of transactions and fair dealings.
21. These three functions are performed by the SEBI to promote and develop activities in stock exchange and increase the business in
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stock exchange:
i. Undertaking measures to develop the capital markets by adapting a flexible approach.
ii. Conducting research and publishing information useful to all market participants.
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iii. Training of intermediaries of the securities market.

22. a. Primary market is the segment of capital market being approached by the company. It is also known as the new issue market
as the securities are issued for the first time by the companies through this market. In order to raise capital in the form of
equity, a company can sell its shares to members of the public. When shares are sold directly to the public, this is done via the
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primary market route. The sale of securities in the primary market is usually done through an investment bank or finance
syndicate of securities dealers.
b. The two methods of floatation used by the company to raise the required capital are issue through prospectus and Offer for
sale.
In case of the issue through the prospectus, the company approaches the members of the general public directly by issuing a
prospectus whereas in case of Offer for sale, the company approaches members of the general public indirectly through
intermediaries like issuing houses, stockbrokers etc.
23. a. Financial markets is the other financial intermediary that helps in the process of channelizing the savings of the households
into the most productive use. Financial market prices may not indicate the true intrinsic value of a stock due to
macroeconomic forces like taxes. In addition, the prices of securities are heavily reliant on informational transparency to
ensure efficient and appropriate prices are set by the market.
b. The two functions of financial market are as follows:
i. It helps to determine the price for the financial asset in a particular financial market through the market forces of demand
and supply
ii. It provides liquidity to the financial assets by providing ready markets wherein the securities can be converted into cash or
vice versa easily.
24. These functions are performed by SEBI to protect the interest of investor and provide safety of investment.

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 i. Promotion of fair practices and code of conduct in securities market.
ii. Undertaking steps for investor protection.
iii. Controlling insider trading and imposing penalties for such practices.
25. The objectives of NSE are-
i. To ensure that the investors using an electronic trading system can have a fair, transparent and efficient securities market.
ii. To establish a broad trading facility for both equities and debt instruments.
iii. To ensure access to investors from every nook and corner of the country through an appropriate communication network.
iv. To improve the standard of the securities market.
26. The abbreviation SEBI stands for Securities and Exchange Board of India. Sensex is the benchmark index of the Bombay Stock
Exchange (BSE). Since BSE has been the leading exchange of Indian Securities Market, the Sensex is an important indicator of
the Indian stock market. Thirty (30) shares are included in the Sensex.
27. Stock markets are the markets in which existing securities are bought and sold. The primary function of stock markets is to
provide a ready and continuous market for securities. It ensures easy liquidity of the securities held by various investors. The
presence of a stock exchange is an assurance to the investors that their investments can be converted into cash as and when
required by them.
28. Main objectives of SEBI are :

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i. To educate the investors and to protect their rights and interests.
ii. To regulate the stock exchanges and securities industry to promote their orderly functioning.

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iii. To prevent the malpractices.
iv. To ensure that brokers, intermediaries and merchant bankers are following code of conduct.
29. Primary market is the market where securities are being issued for the first time. Therefore, it is also known as 'New Issue Market'
(NIM).
Methods of floatation are as follows:
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i. e-IPOs: It is a new method of issuing securities through online system of stock exchange. In this, company has to appoint
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registered brokers for the purpose of accepting applications and placing orders. The issuer company has to apply for listing of
its securities and the leading manager coordinates all the activities of these issues through various intermediaries.
ii. Offer through prospectus: Under this method, the company issues a prospectus to inform and attract general public In a
prospectus, the company provides details about the purpose for which funds are being raised, past financial performance of the
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company, background and future prospects of the company.

iii. Offer for sale: Under this method, securities are not issued directly to the public but are offered for sale through
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intermediaries like issuing houses on stock brokers at a fixed price.

iv. Private placement: Under this method, company sells the securities to some selected institutional investors (like UTI, LIC,
etc) and some individuals.
v. Right issue: This is a right (or privilege) to existing shareholders to subscribe to a new issue of shares in proportion to the
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number of shares held by them.

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30. a. Securities And Exchange Board of India (SEBI) regulates the working of stock exchanges in India.The Securities and
Exchange Board of India was established as a non-statutory regulatory body in the year 1988, but it was not given
autonomous, statutory powers until January 30, 1992, when the Securities and Exchange Board of India Act was passed by the
Parliament of India. SEBI supplanted the Controller of Capital Issues, which hitherto had regulated the securities market in
India, as per the Capital Issues (Control) Act of 1947, one of the first acts passed by the Parliament of India following its
independence from the British Empire.
b. Three functions performed by stock exchanges are as follows:
i. Ensures liquidity and marketability of existing securities by providing a ready and continuous market for the sale and
purchase of securities.
ii. Helps in determining the prices of the securities through the forces of demand and supply.
iii. It provides a legal framework for fair and safe dealings.
c. Two advantages of screen-based trading are as follows:
i. As investors get access to the stock market during real time, there is complete transparency in the dealings.
ii. It provides a common platform for the exchange of securities thereby increasing the efficient transactions by saving time,
effort and money.
31. a. Capital Market - 'Unicap Ltd is proposing to issue 10,000 8% Debentures of ₹ 1,000 each'.
Money Market - 'Certificate of Deposit of ₹ 25,00,000 for meeting its fund requirements during expansion'.

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 b. Basis Capital Market and Money Market:
Basis of
Capital Market Money Market
Distinction

Its participants are institutional investors (RBI),

The participants of capital market are financial
Participants banks, Nonbanking Finance Companies (NBFCs),
institutions, banks, public and private companies, etc.
etc.

Instruments The main instruments traded in the Capital Market are The main instruments are treasury bills, Call money,
Traded equity shares, preference shares, debentures, bonds, etc. Commercial paper, trade bills, etc.

32. It Checks Price Rigging:

Price rigging refers to manipulating the prices of securities with the main objective of inflating or depressing the market price of
securities. SEBI prohibits such practice because this can defraud and cheat the investors.
33. The money market instrument that the company can use for the above purpose is commercial paper.
Commercial paper: It is issued as an unsecured promissory note by large and creditworthy companies for meeting their short-
term needs of funds It is a negotiable instrument, transferable by endorsement and delivery. This instrument is generally used for
'bridge financing', i.e a method of financing used by companies to cover the flotation costs of issuing equity shares, preference

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shares, etc. Commercial paper though a short-term obligation is issued as part of a continuous rolling program, which is either a
number of years long (as in Europe), or open-ended (as in the U.S.).

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34. Dematerialisation of securities
Your investments in shares and debentures can be held in electronic or dematerialised form in a depository. Depository is an entity

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which holds securities (shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at
the request of the investors.
Dematerialisation is comparable to keeping your money in a bank account. In demat form, your physical share certificates are
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replaced by electronic book entries; purchase of shares are reflected as credits in your demat account and sales are reflected as
debits.
35. With the growth in the dealings of stock markets, lot of malpractices also started in stock markets such as price rigging, a
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unofficial premium on new issue, and delay in delivery of shares, violation of rules and regulations of stock exchange and listing
requirements. Due to these malpractices the customers started losing confidence and faith in the stock exchange. So government
of India decided to set up an agency or regulatory body known as Securities Exchange Board of India (SEBI).
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36. Following are the advantages of Demat shares over the physical shares:
i. Demat shares facilitate easy transfer of ownership. There is no delay in transfer and registration. Transfer of shares can be
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effected in a much simpler and faster way.

ii. Demat shares avoid the chances of duplicate, fake and forged shares.
iii. Demat shares are safe and free from the evils of the fire, theft, pilferage, mutilation, etc. An investor is not required to store
share certificates.
Ed

iv. Demat shares minimise transactions cost because it involves no paperwork. There is no need for printing share certificates and
transfer deed.
37. Functions of stock exchange are as follows:
i. Contributes to Economic Growth.
ii. Providing Liquidity and Marketability to Existing Securities
iii. Pricing of Securities
iv. Safety of Transaction
v. Better allocation of capital
vi. Providing scope for speculation
38. a. The objective of setting up SEBI are outlined below:
i. To prevent trading malpractice in the securities markets.
ii. To protect the rights and interest of investors, and to guide and educate them.
iii. To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers, etc. with a
view to making them competitive and professional.
iv. To regulate stock exchanges and the securities market to promote their orderly functioning.
b. Protective function is performed by SEBI: "The SEBI has imposed a penalty of Rs.7,269.5 crore on Pearls Agrotech
Corporation Limited.

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 As the name suggests, the main focus of this function of SEBI is to protect the interest of investor and security of their investment

As protective functions SEBI performs many functions e.g. checking of price rigging, prohibits insider trading, prohibits
fraudulent and unfair trade practices etc
39. The functions performed by the Stock Exchange are as follows:
i. Economic Barometer: A stock exchange is a reliable barometer to measure the economic condition of a country.
ii. Pricing of Securities: - 'Stock exchange takes effective steps in educating the public about investments'. It encourages wider
ownership of securities.
iii. Safety of Transactions - 'It provides a platform for channelising the savings to the most productive use'. It gives investors the
chance to disinvest and reinvest.
iv. Contributes to Economic Growth - 'It ensures that investing people gets a safe and a fair deal in the market, the membership
of the stock exchange is well regulated and its dealings are well defined according to the existing legal framework'.
40. i. The function performed by the market here is mobilisation of savings and channelising them into the most productive
use/allocative function.
ii. The other three functions of financial market are:
a. Facilitating price discovery: The price of any goods or services is determined by the forces of demand and supply. Like

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goods and services, the investors also try to discover the price of their securities. The financial market is helpful to the
investors in giving them proper price.

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b. Reduce the cost of transactions: Financial market provides complete information regarding price, availability and cost of
various financial securities So, investors and companies do not have to spend much on getting this information.
c. Provides liquidity to financial assets: The investors can invest their money, wherever they desire, in securities through
the medium of financial market and convert them into cash by selling their financial assets through the mechanism of
financial market. ac
41. Yes, I agree as SEBI regulates and protects the interest of investors. SEBI was established in 1988 and given a statutory status in
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1992, to protect the investors from the fraudulent malpractices, rampant in securities market before 1988. As a watch dog, it
regulates the market and protects the investors by keeping a check on various manipulative activities by performing the following
functions:
i. Regulates takeover bids by companies.
ii. Prohibits fraudulent and unfair trade practices.
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iii. Undertakes several steps to protect the investors, for example calls for information by conducting inspections, enquiries and
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audits of the companies.

42. The procedure for purchase of and sale of securities in a stock exchange involves the following steps:
i. Selection of a broker: The buying and selling of securities can only be done through SEBI registered brokers who are
members of the Stock Exchange. The broker can be an individual, partnership firms or corporate bodies. So the first step is to
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select a broker who will buy/sell securities on behalf of the investor or speculator.
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ii. Opening of a demat account with depository: Dematerialised (Demat) account refers to an account which an individual
must open with the depository participant (banks, stock brokers) to trade the listed securities in electronic form. Depository is
an institution/organisation which holds securities in electronic form, in which trading is to be done. At present there are two
depositories in India:
a. CDSL (Central Depository Services Ltd ) Depository Participant (DP) maintain your securities account balance and
intimates the account status from time to time.
b. NSDL (National Securities Depository Ltd ).
iii. Placing the order: After opening the Demat Account, the investor can place the order. The order can be placed to the broker
either (DP) personally or through phone, email, etc. Investor must place the order very clearly specifying the range of price at
which securities can be bought or sold. e.g. “Buy 100 equity shares of Reliance for not more than Rs 500 per share.”
iv. Executing the order: According to the instructions, the broker executes the order and buys or sells the required securities, the
broker then issues a contract note. A copy of contract note specifies the name and the price of securities, names of parties,
brokerage charges, etc, which is signed by the broker.
v. Settlement: This is the last stage in the trading of securities done by brokers on behalf of their clients. The mode of settlement
depends upon the nature of contract. Equity spot markets follow a T + 2 rolling settlement. This means a trade taking place on
Monday gets settled by Wednesday. Trading times on stock exchange are between 9.55 am and 3.30 pm IST, from Monday to
Friday. Each exchange has its own clearing house, which assumes all settlement risk.

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43. i. The company should buy Shares, debentures, bonds.
ii. The Capital market is expected to give a better return in a buoyant economy as
a. The securities are held for a longer duration
b. There is a scope of earning capital gains on shares.
iii. The securities are safe in this market as compared to the money market because:
a. Capital markets are well organized whereas money markets are not that organized
b. Liquidity is high in the money market whereas liquidity is comparatively low in capital markets.
c. Due to high liquidity and low duration of maturity in money markets, Instruments in money markets are a low risk
whereas capital markets are the comparatively high risk.
44. i. The function performed by the market in the above case is—Mobilisation of savings and channelising them into the most
productive use or allocative function.
ii. Money market is the market segment where unsecured, short-term debt instruments are traded. The three points difference
between money and capital market are
Basis Capital market Money market

It refers to the whole network of organisations, institutions and instruments Money market is a market for

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that deal in medium and long-term funds. Capital markets channel the wealth short-term funds which deals in
Meaning
of savers to those who can put it to long-term productive use, such as monetary assets whose period of

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companies or governments making long-term investments. maturity is upto one year.

Period of maturity ranges from

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Duration Period of maturity is more than one year.
one day to one year.

In this market, there is a formal

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Liquidity Only actively traded securities have ready market. arrangement for creating
liquidity.

45. SEBI tries to promote activities of stock exchange by adopting flexible and adoptable approach in following way:
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(a) SEBI has permitted internet trading through registered stock brokers.
(b) SEBI has made underwriting optional to reduce the cost of issue.
(c) Even initial public offer of primary market is permitted through stock exchange.
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46. Yes, I agree with the given statement as the essential function of a primary market is that it directly promotes capital formation
because the flow of funds is directly from savers to entrepreneurs who utilize these funds for setting up new projects, expansion,
diversification, modernization of existing projects, mergers and takeovers etc. On the other side, secondary market indirectly
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contributes in capital formation by providing liquidity and marketability to existing securities. Through secondary market,
investors can convert their securities into cash as and when required.
47. Private Placement: Private placement is the allotment of securities by a company to institutional investors and some
selected individuals. It helps to raise capital more quickly than a public issue. Access to the primary market can be
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expensive on account of various mandatory and non-mandatory expenses. Some companies, therefore, cannot afford a
public issue and choose to use private placement. Section 42 of the Companies Act, 2013 states that the maximum
allotment that can be done in a year is 200, exceeding which the issue is considered public and the company has to follow
the procedure of public issue.
Rights Issue: This is a privilege given to existing shareholders to subscribe to a new issue of shares according to the terms
and conditions of the company. The shareholders are offered the 'right' to buy new shares in proportion to the number of
shares they already possess. Right issue is a convenient and inexpensive method of raising additional capital. This right is
called the pre-emptive right of the existing shareholders.
48. "Capital Markets" refers to activities that gather funds from some entities and make them available to other entities needing funds.
The core function of such a market is to improve the efficiency of transactions so that each individual entity doesn't need to do
search and analysis, create legal agreements, and complete funds transfer.The two parts of Capital Market are:
(i) Primary Market
(ii) Secondary Market
49. Safety of Transactions:
In stock market only the listed securities are traded and stock exchange authorities include the companies names in the trade list
only after verifying the soundness of company. The companies which are listed they also have to operate within the strict rules and
regulations. This ensures safety of dealing through stock exchange.

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50. Difference between capital market and money market:
Basis Capital Market Money Market

A section of financial market where long term A segment of the financial market where lending and
Nature
securities are issued and traded. borrowing of short term securities are done.

Main participants are :

Main participants are:
Reserve Bank of India
Financial Institutions
Commercial banks
Participants Banks
Mutual funds
Foreign investors
Financial Institutions
Corporate houses.
Corporate houses.

Risk Capital market is more risky. Money market is less risky.

In comparison to the money market instruments,

Liquidity Money market instruments are highly liquid.
capital market securities are less liquid.
51. Money market instruments are more liquid as compared to capital market instruments due to presence of Discount Finance House
of India (DFHI) in money market. DFHI provides a ready market for money market instruments and that is why, these instruments

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enjoy higher liquidity.In capital market instruments also enjoy liquidity as they are tradeable on stock exchanges. However, they

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are not so liquid as sometimes it becomes very difficult to sell them at good price. So, money market instruments provide more
liquidity than capital market instruments.

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52. a. The intermediaries like 'Go Lucky' who serve as a link between investors and depository are called Depository participants. A
depository helps interacting with the investors through its agents which are called Depository Participants (DPs) like banks,
investors who want to enjoy the services of a depository in terms of buying and selling stocks/shares have to open an account
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with the depository participant.
b. National Securities Depository Limited NSDL and Central Depository Services Limited (CDSL) are the two depositories
operating in India.
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c. A depository participant is authorised to maintain D-Mat accounts of the investors.
d. Primary market and Secondary market are the two segments of the capital market in which an investor can deal through 'Go
Lucky' portal.
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53. i. Share Market/Stock Exchange.

ii. Characteristics of Stock Exchange:
a. Organised Market: Stock exchange is an organised market. Every stock exchange has a management committee, which
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has all the rights to management and control of the exchange. All the transactions taking place in the stock exchange are
done as per the prescribed procedure under the guidance of the management committee.
b. Necessary to Obey the Rules and Bye-laws: While transacting in the stock exchange, it is necessary to obey the rules
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and bye-laws determined by the stock exchange.

c. Values:
Saving Habits
Economic Development
54. a. To Compensate its floatation cost of issuing 9% debentures, the Finance Manager of “Foods India Ltd.” should Issue
“Commercial Paper” for this purpose. Commercial Papers are “Unsecured Promissory Note” used to meet the floatation cost,
which is used to raise long term funds. These papers were introduced in India for the first time in the year 1990.
b. Such instruments are traded in the “Money Market” and Commercial Paper is a short term unsecured promissory note. So it is
beneficial for the company to issue such instruments, as no security is required to be provided by the company.
55. The primary market is a market which deals with new securities being issued for the first time. Initial public offer means the first
public offering of securities of a company which is followed by a listing of its shares on the stock market. The initial public offer
is the first issue of securities to the public. Under this method, the company wanting to raise capital issues a prospectus to attract
the investors.
SEBI registered brokers have to be appointed for the purpose of accepting applications and placing orders with the company. The
issuer company also appoints a registrar to the issue having connectivity with the exchange. The lead manager coordinates all the
activities amongst intermediaries to connect with the issue.
56. Stock exchange provides safety, security and equity(justice) in dealings as transactions are conducted as per well defined rules and
regulations. The managing body of the exchange keeps control on the members. Fraudulent practices are also checked effectively.

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 The three functions of stock exchange are as follows:
i. Providing Liquidity and Marketability to Existing Securities: Stock exchange is a market place where previously issued
securities are traded. Various types of securities are traded here on regular basis.
ii. Pricing of securities: A stock exchange provides platform to deal in securities. The forces of demand and supply work freely
in the stock exchange. In this way, prices of securities are determined.
iii. Safety of Transactions: Stock exchanges are organised markets. They fully protect the interest of investors. Each stock
exchange has its own laws and bye-laws. Each member of stock exchange has to follow them and if any member is found
violating them, his membership is cancelled.
57. A financial market is a place where financial instruments or assets are exchanged or bought and sold. Financial markets help to
mobilize savings and convert them into investments. They also attract funds from investors and channel them to corporations. A
financial market refers to the market where the creation and exchange of financial assets such as shares and debentures takes
place.
The functions of the financial market are as follows:
Mobilisation of Savings and Channeling them into the most Productive Uses: A financial market facilitates the
transfer of savings from savers to investors. It gives savers the choice of different investments and thus helps to channel
surplus funds into the most productive use.

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Transfer of Resources: Financial market facilitates the transfer of real economic resources from lenders to ultimate users.
Capital Formation: Capital formation is the net addition to the existing stock of an economy's capital. The financial

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market provides a channel through which savings flow to industrial and commercial organizations in the form of capital.
This leads to capital formation.

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Facilitating Price Discovery: Forces of demand and supply help to establish a price for a commodity or service in the
market. In the financial market, households are suppliers of funds and business firms represent the demand. The
interaction between them helps to establish a price for the financial asset which is being traded in that particular market.
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Reduced cost of transaction: By rendering information regarding the securities being traded, their prices, availability, a
financial market helps in reducing the cost of transaction in terms of effort, money and time.
58. a. Primary market
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Primary market is a type of capital market in which new securities are issued by the companies. Since AHM Telecom Co. Ltd.
wants to raise ₹ 500 crore by issuing new equity shares, it will look for the primary market. A primary market is a source of
new securities. Often on an exchange, its where companies, governments, and other groups go to obtain financing through
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debt-based or equity-based securities.

b. Methods through which AHM Telecom Co. Ltd. can issue equity shares are:
i. Offer through prospectus: This is the most popular method of raising funds by public companies in the primary market.
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This 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. The contents of the prospectus must be
in accordance with the provisions of the Companies Act and SEBI disclosure and investor protection guidelines. The
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issues may be underwritten and must be listed on at least one stock exchange. It involves inviting subscription from public
through issue of prospectus.
ii. Offer for sale: Under this method securities are not issued directly to the public but are offered for sale through
intermediaries like issuing houses or stock brokers. In this case, a company sells securities at an agreed price to brokers
who, in turn, resell them to the investing public
iii. Private placement: Private placement is the allotment of securities by a company to institutional investors and some
selected individuals. It helps to raise capital more quickly than a public issue. Access to the primary market can be
expensive on account of various mandatory and non-mandatory expenses. Some companies, therefore, cannot afford a
public issue and choose to use private placement.
iv. Rights issue: This is a privilege given to existing shareholders to subscribe to a new issue of shares according to the terms
and conditions of the company. The shareholders are offered the 'right' to buy new shares in proportion to the number of
shares they already hold.
59. Primary market is the market in which a security is sold for the first time. The purchaser buys newly issued securities. Primary
issues are used by companies for the purpose of setting up a new business or for expanding the existing business. In this way, the
primary market performs the function of facilitating capital formation in the economy because savings of surplus units are
channelled to the business units which invest this fund in fixed assets.
Secondary market is the market for the sale and purchase of previously issued securities. Ownership of existing securities is
exchanged between investors. The company is not involved at all.

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 Secondary markets do not directly contribute to capital formation. Since, secondary market enhances the cash ability (liquidity) of
shares, it indirectly promotes capital formation.
60. i. Depository is like a bank where investors can deposit or withdraw securities. It is necessary for every company to be
registered with depository if the company wants its securities to be transacted in the electronic form.
ii. An investor may hold its securities in physical form or Demat form. In case, he wishes to hold his securities in Demat form
(electronic form), he is required to open an account with DP. For this, he may choose any of the available DP's for e.g. ICICI,
Indiabulls securities, etc.
iii. On the purchase of shares through a trading account in the secondary market, the DP credits the beneficiary account (demat
account number of the investor) with the equivalent number of shares in the electronic form.
iv. The DP also provides the statement of beneficiary account at regular intervals to the investor. It also updates the statement
after any transaction (buying/selling of shares).
61. i. Primary market: The primary market is also known as the new issues market. It deals with new securities being issued for the
first time. A company can raise capital through primary market in form of share, debentures, bonds,
ii. Right issue: This is a privilege given to existing shareholders to subscribe to a new issue of shares according to the terms and
conditions of the company. The shares are offered to the right to buy new shares in proportion to the number of shares they
already hold. etc.

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iii. Offer through Prospectus: Offer through prospectus is the most popular method of raising funds by public companies in the
primary market. This involves inviting subscriptions from the public through the issue of prospectus. A prospectus makes a

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direct appeal to investors to raise capital, through an advertisement in newspapers and magazines. The contents of the
prospectus have to be in accordance with the provisions of the Companies Act and SEBI disclosure and investor protection

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guidelines.
i. Offer for Sale: Under this method, securities are not issued directly to the public but are offered for sale through
intermediaries like issuing houses or stockbrokers. In this case, a company sells securities enbloc an agreed price to
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brokers who, in turn, resell them to the investing public.
62. Regulatory functions of SEBI are as follows
i. To regulate business in stock exchanges.
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ii. To register and regulate the working of intermediaries.
iii. To register and regulate the working of mutual funds.
iv. To conduct inquiries and audit of stock exchange.
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v. Regulation of taken-over bids by companies.

vi. To register and regulate the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust
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deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisors and such other
intermediaries who may be associated with securities markets in any name.
vii. To register and regulate the working of the depositories, participants, custodians of securities, foreign institutional investors,
credit rating agencies.
Ed

viii. To register and regulate the working of venture capital funds and collective investment schemes including mutual funds
ix. To promote and regulate self-regulatory organizations
x. To prohibit fraudulent and unfair trade practices relating to securities markets
63. a. Primary market
b. The first method is 'offer for sale' and the other one is 'Rights Issue'.
Offer for Sale- In this method, securities are not issued directly to the public but are offered for sale through intermediaries
like issuing houses or stockbrokers. In this case, a company sells an entire lot of securities at an agreed price to the
intermediaries who, in turn, resell them to the investing public at a higher price.
Rights Issue- This is a privilege available to existing shareholders to subscribe to a new issue of shares. The shareholders are
offered the right to buy new shares in proportion to the existing shares held by them.
c. Banks and financial institutions.
64. Stock exchange is a marketplace where securities, commodities, derivatives and other financial instruments are traded. The core
function of an exchange is to ensure fair and orderly trading and the efficient dissemination of price information for any securities
trading on that exchange. Exchanges give companies, governments, and other groups a platform from which to sell securities to
the investing public.
Main functions of stock exchange are as follows

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 i. Pricing of securities: The stock market helps to value the securities on the basis of demand and supply factors. Higher the
demand for such securities, higher is their value. The valuation of securities is useful for investors, government and creditors.
ii. Contributes to economic growth: In stock exchange, securities of various companies are bought and sold. This process of
disinvestment and reinvestment helps to invest in most productive investment proposal and this leads to capital formation and
economic growth.
iii. Spreading of equity cult: Stock exchange encourages people to invest m ownership securities by regulating new issues,
better trading practices and by educating people about investment.
iv. Liquidity: The main function of stock market is to provide ready market for sale and purchase of securities which assures the
investors that their investment can be converted into cash whenever they want.
v. Safety of transaction: The stock exchange is well regulated and its dealings are well defined according to the existing legal
framework This ensures that the investing public gets a safe and fair deal m the market.

65. Basis Capital Market Money Market

The participants of money market are financial

The Participants in the capital market are financial
1. institutions, banks, public and private companies but
institutions, banks, public and private companies, foreign
Participants foreign and ordinary retail investors do not
investors and ordinary retail investors from public.
participate in money market.

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The common instruments of capital market are equity The common instruments of money market are

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2.
shares, debentures, preference shares, bonds, asset treasury bills, trade bills, Certificate of deposit, call
Instruments
secularisation, retained earnings and EURO issues. money, commercial papers and trade credit.

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3. Expected The expected return is higher in capital market as The expected return of money market is less due to
Return compared to money market. short duration.
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The instruments of capital market are riskier in terms of
The instruments of money market are safe or less
returns as well was in terms of principal repayment as
4. Safety risky due to short duration and soundness of issuers.
issuing company may fail. These are riskier in comparison
They have low risks.
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to money market.

The capital markets deals in medium and long term Money market deals with short term securities having
5. Duration
securities. maximum period of 1 year.
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66. The advantages are:

i. It is convenient: When it comes to online trading, you only need to open a trading account via the internet and you’re good to
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go. You’re not bound by time and place as long as you have an internet connection. Hence, online trading is convenient and
accessible from anywhere with limited hassle. It also saves time.
ii. It is cheaper: In online stock trading, the stockbroker fee which you will have to pay is lower when compared to the
commission charged by the traditional method. If you trade in a sufficiently large volume of stocks, it is possible for you to be
Ed

able to negotiate your broker’s fees.

iii. You can monitor your investments anytime: Online trading allows you to buy or sell shares according to your convenience. It
offers advanced interfaces and the ability for investors to see how their money is performing throughout the day. You can use
your phone or your computer to evaluate your profit or loss.
iv. It almost eliminates the middleman: Online trading allows you to trade with virtually no direct broker communication. Apart
from reducing the overall trading cost, this benefit also makes the trading hassle free, making this service much more
lucrative.
v. Faster Transactions: Online banking is fast and efficient. Funds can be transferred between accounts almost instantly,
especially if the two accounts are held at the same banking institution. All it takes to be able to buy or sell stocks is a single
click of the mouse. Through this, a quicker exchange can be made which may also ensure quicker earnings.
67. Objectives of SEBI:
i. To regulate the stock exchanges and securities industry to promote their orderly functioning.
ii. To educate the investors and to protect their rights and interests.
iii. To prevent fraudulent and malpractices by having balance between self regulation of business and its statutory regulations.
iv. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.
Functions of SEBI:
1. Protective Functions:

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 1. To protect the capital market from manipulations, price rigging and misleading statements.
2. To control the insider trading and to impose penalties for such practices.
3. To protect the investors.
4. To promote fair and healthy practices and to maintain the code of conduct.
2. Regulatory Functions:
i. To Register the brokers, sub-brokers and other players in the market.
ii. To Register the Mutual funds and other investment schemes.
iii. To Regulate the :
Stock brokers
Underwriters
Merchant bankers
Portfolio exchanges
Takeover bids by companies
iv. To conduct the audit of stock exchanges and intermediaries.
v. To charge fee and other charges.
vi. To perform and exercise the power given by the Government of India under Securities Contracts (Regulation) Act 1956.

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3. Development Functions
i. To provide the training to the intermediaries.

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ii. To conduct the research.
iii. To Publish the useful information.

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iv. To develop the capital market by adapting a flexible approach.
68. The exchange provides trading in the following two segments:
i. Capital Market Segment: This segment refers to the trading platform for a wide range of fixed income securities like central
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government securities, bonds issued by public sector undertakings, zero coupon bonds, treasury bills, commercial papers,
certificates of deposit, mutual funds, corporate debentures etc.
ii. Whole Sale Debt Market Segment: The main role of this segment is to provide a trading platform for a wide range of fixed
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income securities. It includes:
Treasury Bill.
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Commercial Paper.
Central Government Securities.
Certificate of deposit.
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Mutual Funds.
Bonds issued by public sector undertakings.
Debentures.
69. Following are the steps in the "Trading Procedure" of Stock Exchange:
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i. Selection of broker - The first step is to select a broker who will buy/sell securities on behalf of the investor. This is necessary
because trading of securities can only be done through SEBI registered brokers who are the members of a stock exchange.
Brokers may be individual, partnership firms or corporate books.
The broker charges brokerage/commission for his services.
ii. Opening Demat account - The next step is to open a Demat account. Demat (Dematerialised) account refers to an account
which an Indian citizen must open with the depository participant (banks, stock, brokers) to trade in listed securities in
electronic form.
The securities are held in the electronic form by a depository. At present, there are two depositories in India NSDL (National
Securities Depository Ltd.) and CDSL (Central Depository Services Ltd). Depository interacts with investors through
depository participants. Your Depository Participant will maintain your securities account balances and intimate to you the
status of your holding from time to time.
iii. Placing the order - The next step is to place the order with the broker. The order can be communicated to the broker either
personally or through telephone, cell phone, e-mail, etc.
The instructions should specify the securities to be bought or sold and the price range within which the order is to be executed.
Only the securities of listed companies can be traded on the stock exchange.
iv. Executing the order- According to the instructions of the investor, the broker buys or sells securities.
The broker then issues a contract note. A copy of the contract note is sent to the client. The contract note contains the name

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 and the price of the securities, names of the parties, brokerage charged. It is signed by the broker.
v. Settlement - This is the last stage in the trading of securities done by the brokers on behalf of their clients. The mode of
settlement depends upon the nature of the contract. Equity spot market follows a T+2 rolling settlement. This means that any
trade taking place on Monday gets settled by Wednesday. Trading on stock exchanges takes place between 9:15 am and 3:30
pm. Indian Standard Time, from Monday to Friday. Delivery of shares must be made in dematerialised form, and each
exchange has its own clearing house, which assumes all settlement risks.

BASIS FOR
PRIMARY MARKET SECONDARY MARKET
70. COMPARISON

The marketplace for new shares is called the primary The place where formerly issued securities
Meaning
market. are traded is known as Secondary Market.

Another name New Issue Market (NIM) After Market

Type of Purchasing Direct Indirect

It supplies funds to budding enterprises and also to

Financing It does not provide funding to companies.
existing companies for expansion and diversification.

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How many times
Only once Multiple times
security can be sold?

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Buying and Selling
Company and Investors Investors
between

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Who will gain the
amount on the sale of Company Investors
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shares?

Intermediary Underwriters Brokers

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Fluctuates depends on the demand and
Price Fixed price
supply force

Organizational Not rooted in any specific spot or geographical

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It has a physical existence.

difference location.
71. Trading procedure :
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Selection of a Broker: The first step is to select a broker, who will buy/sell securities on behalf of the speculator/investor. This is
necessary because trading of securities can only be done through SEBI registered brokers, who are members of the stock
exchange. Brokers may be individuals, partnership firms and corporate bodies.
Opening Demat Account with Depository: The next step is to open a demat account. Demat (Dematerialised) account refers to
Ed

an account which an Indian citizen must open with the depository participant (banks and stockbrokers) to trade in listed securities
in "electronic form. The securities are held in the electronic form by a depository. ‘Depository’ is an institution/organization which
holds securities (e.g. shares, debentures, bonds, mutual funds, etc) in electronic form, in which trading is done.
Placing the Order: The next step is to place the order with the broker. The order can be communicated to the broker either
personally or through telephone, cell phone, e-mail, etc.
The instructions should specify the securities to be bought or sold and the price range within which the order is to be executed.
Only the securities of listed companies can be traded on the stock exchange.
Executing the Order: According to the instructions of the investor, the broker buys or sells securities. The broker then issues a
contract note. A copy of the contract note contains the name and the price of securities, names of the parties, brokerage charges,
etc. It is duly signed by the broker.
Settlement: This is the last stage in the trading of securities done by the brokers on behalf of their clients. The mode of settlement
depends upon the nature of the contract. Equity spot markets follow a T + 2 rolling settlement. This means that any trade taking
place on Monday gets settled by Wednesday. Stock, exchange operates from Monday to Friday between 9:55 am and 3:30 pm.
Each exchange has its own clearing house, which assumes all settlement risk.
72. A depository in a simple term means a place where something is a deposit for storage and security, however in our capital market,
this term has a lot of relevance, we define
“Depository as an institution that works like the bank”

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 Likewise our bank holds investor fund, similarly, depository maintains an account for investors securities (share, debentures,
mutual fund etc) hold by them in a dematerialized or an electronic form.
Investor used to hold the securities in the form of physical certificate which has their own disadvantages and to take control over
the irregularities of the capital market for the protection of an investor`s interest, Depository system has been introduced in India
where the securities could be handled in an electronic form by the process of dematerialization.
Depositories in India:
We have 2 depositories in India which are well known as NSDL (National securities depository limited) and CSDL (Central
Depository Services (India) Limited). They interface with the investors through their agents called Depository participants (DPs).
DPs could be the banks (private, public and foreign), financial institutions and Sebi-registered trading members.
73. a. Flotation costs are incurred by a publicly traded company when it issues new securities, and includes expenses such as
underwriting fees, legal fees and registration fees. Companies must consider the impact these fees will have on how much
capital they can raise from a new issue. Flotation costs, expected return on equity, dividend payments and the percentage of
earnings the business expects to retain are all part of the equation to calculate a company's cost of new equity. Bridge
financing is the other name used for the funds required to meet floatation costs.
b. Commercial paper is an unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts
payable and inventories and meeting short-term liabilities. Maturities on commercial paper rarely range longer than 270 days.

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Commercial Papers issued by large and credit worthy companies. The instrument is in the form of an unsecured promissory
note and is freely transferable by endorsement. It is sold at discount and redeemed at par. Its maturity period may range from a

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fortnight to a year. It is also used to meet the short term seasonal and working capital requirements of a business enterprise.
For example, it is used for the purpose of bridge financing.

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c. Capital Market and Money Market.
d. Differences between Primary Market and Secondary Market.
S.
Basis Capital Market Money Market
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No

It is a market short term funds whose maturity period

1. Duration It is a market for long term
is up to one year.
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The main participants in the capital market are

2. Participants banks, financial institutions, corporate bodies, The main participants are institutional investors.
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foreign investors and retail investors.

Since the cost of securities may be low, investment

Investment Since the cost of securities may be high, investment
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3. can be made in the capital market can be with less

outlay in the money market requires huge capital outlay.
capital.

The securities in the money market enjoy high

The securities in the capital market enjoy good
4. Liquidity liquidity as The Discount Finance house of India
Ed

liquidity.
works as a compulsory market maker.

Rusk and The instruments in the capital market carry high The instruments in the money market carry low risk
5.
return risk as the expected return is high on them. ar the expected return is low on them.
74. a. The stock exchanges now provide an on-line fully automated ‘screen based trading system (SBTS)’ A member can punch into
the computer quantities of securities and the prices at which he likes to transact and the transaction is executed as soon as it
finds a matching order from a counter party. It allows faster incorporation of price sensitive information into prevailing prices,
and enables increasing the informational efficiency of markets. It enables market participants to see the full market on real
time, making the market transparent. The various documents mentioned above which were issued to Dev during the process of
screen based trading are described below:
i. Order confirmation slip: It's through an order confirmation slip that a broker certifies to the investor that the said order as
placed by a buyer to a broker has been transmitted to and confirmed by the computer system at stock exchange. This slip
is issued the stock exchange, to the broker who then forwards it to the buyer/investor.
ii. Trade confirmation slip: A trade confirmation slip is a document issued by the stock broker showing the details of the
securities bought or sold after the order has been executed electronically.
iii. Contract note: A contract note contains details about the deal i.e. the number of securities bought/sold, price, date and time
of transaction etc. and also includes a unique order code generated by the stock exchange for that particular transaction. It

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 is a legal document, which may be used to settle the claims between the investor and the broker.
b. The two phases involved in the settlement process of screen-based trading described above are:
i. Pay-in day which refers to the steps to be carried out before T+2 day.
"He has been told that the broker will first make the payment to the exchange."
ii. Pay-out day which refers to the steps to is carried out on the T+2 day.
"The exchange will make payment to the other broker who will further forward it to the investor who has sold these
securities."
75. 1. Selection of a Broker
The first step is to select a broker, who will buy/sell securities on behalf of the speculator/investor. This is necessary because
trading of securities can only be done through SEBI registered brokers, who are members of stock exchange. Brokers may be
individuals, partnership firms and corporate bodies.
2. Opening Demat Account with Depository
The next step is to open a demat account. Demat (Dematerialised) account refers to an account which an Indian citizen must
open with the depository participant (banks and stock brokers) to trade in listed securities in "electronic form.
The securities are held in the electronic form by a depository. ‘Depository’ is an institution/organisation which holds securities
(e.g. shares, debentures, bonds, mutual funds, etc) in electronic form, in which trading is done.

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3. Placing the Order
The next step is to place the order with the broker. The order can be communicated to the broker either personally or through

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telephone, cell phone, e-mail, etc.
The instructions should specify the securities to be bought or sold and the price range within which the order is to be executed.

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Only the securities of listed companies can be traded on the stock exchange.
4. Executing the Order
According to the instructions of the investor, the broker buys or sells securities. The broker, then issues a contract note. A copy
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of the contract note contains the name and the price of securities, names of the parties, brokerage charges, etc. It is duly signed
by the broker.
5. Settlement
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This is the last stage in the trading of securities done by the brokers on behalf of their clients. The mode of settlement depends
upon the nature of the contract. Equity spot markets follow a T + 2 rolling settlement. This means that any trade taking place
on Monday gets settled by Wednesday. Stock, exchange operates from Monday to Friday between 9:55am and 3:30pm. Each
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exchange has its own clearing house, which assumes all settlement risk.
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Ed

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