Please refer to Financial Markets Class 12 Business Studies Exam Questions provided below. These questions and answers for Class 12 Business Studies ave been designed based on the past trend of questions and important topics in your class 12 Business Studies books. You should go through all Class 12 Business Studies Exam Questions provided by our teachers which will help you to get more marks in upcoming exams.
Class 12 Business Studies Exam Questions Financial Markets
Class 12 Business Studies students should read and understand the important questions and answers provided below for Financial Markets to understand all important and difficult topics.
Short Answer Type Questions :
Question. Bishnoi Ltd. recently proposed to issue commercial paper of ₹ 10,00,000 and equity shares of ₹ 140 each for meeting its capital requirements of diversification.
(i) Quoting the lines, identify the markets from where they would procure the necessary funds.
(ii) Distinguish between the markets on the basis of duration and investment outlay.
Ans. (i) Money Market – “Bishnoi Ltd. recently proposed to issue commercial paper of ₹ 10,00,000.” Capital Market – “Equity shares of ₹ 140 each for meeting its capital requirements of diversification.”
(ii) Differences between money market and capital market are
|Basis||Money Market||Capital Market|
|Duration||It deals in securities in short-term, i.e. for a period of less than 1 year.||It deals in medium and long- erm securities, i.e. period of more than 1 year.|
|Investment Outlay||It requires huge investment outlay as instruments are quite expensive.||It does not require huge financial outlay as value of securities is long.|
Question. ‘‘A stock exchange is an institution which provides a platform for buying and selling of existing securities.’’ Do you agree with this statement?
Explain two functions of stock exchange.
Ans. Yes, I agree with this statement. Following are the two functions of stock exchange
(i) Providing Liquidity and Marketability to Existing Securities The main function of a stock exchange is the creation of ready market where securities are bought and sold. It gives investors the chance to disinvest and reinvest. This provides both liquidity and easy marketability to already existing securities in the market.
(ii) Pricing of Securities Share prices on a stock exchange are determined by the forces of demand and supply. A stock exchange is a mechanism of constant valuation through which the prices of securities are determined. Such a valuation provides important instant information to both buyers and sellers in the market.
Question. Mr. Vikas Mehra was the chairman of ‘IBM Bank’. The bank was earning good profits. Shareholders were happy as the bank was paying regular dividends. The market price of their shares was also steadily rising. The bank was about to announce the taking over of ‘UK Bank’.
Mr. Vikas Mehra knew that the share price of IBM Bank would rise on this announcement. Being a part of the bank, he was not allowed to buy shares of the bank. He called one of his rich friends Mukand and asked him to invest ₹ 4 crores in shares of his bank promising him the capital gains. As expected, after the announcement, the share prices went up by 50% and the market price of Mukand’s shares was now ₹ 6 crores. Mukand earned a profit of ₹ 2 crores. He gave ₹ 1 crore to Vikas Mehra and kept ₹ 1 crore with him. On regular inspection and by conducting enquiries of the brokers involved, Securities and Exchange Board of India (SEBI) was able to detect irregularity. SEBI imposed a heavy penalty on Vikas Mehra.
Quoting the lines from the above para, identify and state any two functions performed by SEBI in the above case.
Ans. The two functions performed by SEBI in the above case are as follows
(i) SEBI conducts Inspections, Enquiries and Audit of Stock Exchanges It is one of the regulatory functions of SEBI. Lines from the above para which indicate that the above function was performed are
Line “On regular inspection ………………….. was able to detect this irregularity.”
(ii) SEBI controls Insider Trading and imposes Penalty for such Practices It is one of the protective functions of SEBI. Lines from the above para which indicate that the above function was performed by SEBI are
Line “SEBI imposed …………… on Vikas Mehra.”
Question. Describe ‘offer for sale’ and ‘e-IPO’ as methods of new issues in primary market.
Ans. (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 stock brokers at a fixed price.
(ii) e-IPO It is a new method of issuing securities through online system of stock exchange. In this, company has to appoint 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.
Question. Stock exchange acts as a regulator of the securities market. It creates a continuous market where the securities are bought and sold. It gives investors the chance to disinvest and re-invest. Through this process of disinvestment and re-investment, savings get channelised into their most productive investment avenues. To ensure that the investing public gets a safe and 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.
It also ensures wider share of ownership by regulating new issues, better trading practices and taking effective steps in educating the public about investments.
Various functions performed by the stock exchange are discussed in the above para. By quoting lines from the above para, state any four functions of stock exchange.
Ans. Functions of stock exchange discussed are
(i) It provides a ready and continuous market where securities are bought and sold. It gives investors the chance to disinvest or reinvest.
Line “It creates a continuous ……… re-invest.”
(ii) Stock exchange channelise the savings into productive investment avenues. This leads to capital formation and economic growth.
Line “Through this process……investment avenues.”
(iii) It is well regulated and its dealings are well defined according to the existing legal framework. Which ensures fair and safe deal in the market.
Line “To ensure that ……… legal framework.”
(iv) It is an organised market, which takes various steps to guide and educate investors, publish information about companies lasted on the exchange and ensures better and safe trading practices.
Line “It also ensures ……… about investments.”
Question. Due to steep increase in Cash Reserve Ratio (CRR) by the RBI, NPB Bank is facing acute shortage of cash which may result in imposition of penalty by RBI and a loss of goodwill. Being the financial advisor of the bank, advise that how can it meet these short-term obligations, alongwith reasons in support of your answer.
Ans. Being the financial advisor of the bank, we may advise the bank to raise funds through ‘call money’. Call money is a money market instrument that is used by banks to borrow
funds from one another for a period of 1 day to 15 days. It has following features due to which it may be used by NPB Bank
(i) It is a short-term finance repayable on demand.
(ii) It is a tool for inter-bank borrowing.
(iii) It is often used by banks to meet their CRR requirement.
Question. SEBI is the watch dog of security market. Do you agree? Give three reasons in support of your answer.
Ans. Yes, I agree as SEBI regulates and protects the interest of investors. SEBI was established in 1988 and given a statutory status in 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.
(iii) Undertakes several steps to protect the investors, e.g. calls for information by conducting inspections, enquiries and audits of the companies.
Question. Explain the trading procedure on a stock exchange.
Ans. Trading procedure on a stock exchange involves the following steps
(i) Approach a registered broker and open a trading account.
(ii) Open a demat account with depository participant.
(iii) Place on order with the broker to buy or sell shares.
(iv) Execution of the order by the broker.
(v) Issue of a contract note containing details of number of shares sold, price, date and time of deal.
(vi) Delivery of shares sold or payment of cash for the shares bought on the pay-in day.
(vii) Settlement of the deal on the pay-out day, i.e. T + 2 day.
(viii) Delivery of shares and payment of cash by the broker to the investors.
Question. You are working as a financial advisor. One of your clients asked, how securities are sold in secondary market. Give details in this context.
Ans. In secondary market, securities are not directly issued by the company to investors. The securities are sold by existing investors to other investors. Sometimes, the investor is in need of cash and another investor wants to buy the shares of the company, that he could not get directly from the company.
Then, both the investors can meet in secondary market and exchange securities for cash through an intermediary called broker.
Question. ‘Mission Coach Ltd.’ is a large and creditworthy company manufacturing coaches for Indian Railways. It now wants to export these coaches to other countries and decides to invest in new hi-tech machines. Since, the investment is large, it requires long-term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge flotation cost. To meet the expenses of flotation cost, the company decides to tap the money market.
(i) Name and explain the money-market instrument the company can use for the above purpose.
(ii) What is the duration for which the company can get funds through this instrument?
(iii) State any other purpose for which this instrument can be used.
Ans. (i) 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 floatation costs of issuing equity shares, preference shares, etc.
(ii) A firm can get funds for a duration of 15 days to one year.
(iii) Commercial paper can also be used for meeting working capital needs.
Question. Explain any four functions of ‘financial market’.
Ans. Four main functions of financial market are
(i) Mobilisation of Savings and Channelising them into the most Productive Uses A financial market facilitates the transfer of savings from savers to investors. Thus, it helps in channelising surplus funds into the most productive uses.
(ii) Facilitating Price Discovery Households represent the supply of funds and the business firms represent the demand. The interaction between the demand and supply helps in the price discovery of financial asset, which is being traded in a particular market.
(iii) Providing Liquidity to Financial Assets Financial market facilitates easy purchase and sale of financial assets. In doing so, they provide liquidity, which means that financial assets are easily converted into cash whenever required.
(iv) Reducing the Cost of Transactions Financial markets provide a common platform where buyers and sellers meet. It helps in saving time, effort and money of the buyers and sellers at the time of trading in the market, by providing them valuable information.
Question. Explain any four objectives of establishing Securities and Exchange Board of India.
Ans. The main objective of SEBI is to protect the interest of investors, promote the development of and regulate the securities market.
Following are the other objectives of SEBI
(i) To regulate stock exchange and the securities market to promote their orderly functioning.
(ii) To protect the rights and interests of investors, particularly individual investors, and to guide and educate them.
(iii) To prevent fraudulent activities and malpractices by balancing between self-regulation of business and its statutory regulation.
(iv) To regulate and develop a code of conduct and fair practices by intermediates like brokers etc, so that they become competitve and professional.
Question. What is a depository and what services they offer to the investors?
Ans. Depository is an institution or organisation, which holds securities (e.g. shares, debentures, bonds, etc) in electronic form, in which trading is done.
Depositories provide following services to the investors
(i) Maintain records of shareholding in electronic form.
(ii) Enable deposit and withdrawal of securities to and from the depository through the process of dematerialisation and rematerialisation.
(iii) Effect the transfer of securities traded in the depository mode on a stock exchange.
Question. Mr. Axe, one of the directors of XYZ Ltd, knew that bonus shares were to be announced in the next meeting and he expected the price to rise. He bought 10,000 shares from the stock market. By the end of few months, price rose by ₹ 9. He sold his shares and made huge profit.
(i) Name the act of Mr. Axe.
(ii) Is it permitted?
Ans. (i) Mr. Axe is indulged in Insider Trading. Insider trading means buying and selling of securities by those persons (Directors, promoters, etc), who have some secret information about the company and who wish to take advantage of such secret information.
This hurts the interests of the general investors. It was very essential to check this tendency. Many steps have been taken to check insider trading through the medium of the SEBI.
(ii) Insider trading is illegal and is not permitted.
Question. Describe ‘certificate of deposit’ and ‘commercial bill’ as money market instruments.
Ans. (i) Certificate of Deposit It is issued by commercial banks or developmental financial institutions to individuals, institutions, corporations and companies. It is an unsecured, negotiable instrument in bearer form.
It is issued in periods of tight liquidity when the deposits by individuals and households are less, but the demand for credit is high. It helps to mobilise large amount of money in a short time period.
(ii) Commercial Bill It is a bill of exchange used by business firms to meet their working capital needs. It is a short-term self-liquidating, negotiable instrument, used for financing credit sales of a firm. When goods are sold on credit, the seller (drawer) draws a bill of exchange on the buyer (drawee), who accepts it.
Question. Aditya Khosla, the managing director of ‘D.L.W. Ltd.’ and Rajesh Puri, the finance manager were discussing about avenues of investing the idle funds of the company. Aditya Khosla was of the opinion that money should be invested in the capital market whereas Rajesh Puri, being more conservative, felt that it would be better if the investment was made in the money market. Since the economy was buoyant, the managing director convinced Rajesh that they should take advantage of it and invest in the capital market to get good returns.
Ultimately, it was decided to invest the idle funds in the capital market.
(i) What kind of instruments should the company buy?
(ii) Why is the capital market expected to give a better return in a buoyant economy? State the reason.
(iii) Why and how safe are the securities in this market as compared to the money market?
Ans. (i) They should buy ‘capital market instruments’.
(ii) The investment in capital markets generally yield a higher return for investors than the money markets. The possiblity of earnings is higher if the securities are held for a longer duration. First, there is the scope of earning capital gains in equity share. Second, in the long-run, the prosperity of a company is shared by shareholders by way of high dividends and bonus issues.
The capital market directs the savings of the public (investor) into their most productive investment plan, leading to growth and development of economy.
(iii) Capital market instruments are risker both with respect to returns and principal repayments. Issuing companies may fail to perform as pre projections and promoters may defraud investors. But the money market is generally much safer with a minimum risk of default. This is due to the shorter duration of investment and also due to financial soundness of the
issuers, which primarily are the government banks and highly rated companies.
Question. Nature of money market can be well explained with the help of its features. State any three such features of money market.
Ans. Features of money market are as follows
(i) It deals in short-term monetary assets, whose period of maturity is upto one year.
(ii) It is a market where low risk, unsecured and short-term debt instruments are issued and actively traded everyday.
(iii) Liquidity is provided by the Discount and Finance House of India, specially formed for this purpose.
Question. Mr. A is a teacher, having a reputed job with good earnings. He wants to trade on a stock exchange. Enumerate the steps involved for purchase and sale of securities in a stock exchange.
Ans. The procedure for purchase and sale securities in a stock exchange involves the following steps
(i) Selection of a Broker The first step is to select a broker, who will buy/sell securities on behalf of the investor/speculator. Brokers may be individuals, partnership firms or corporate bodies. Selection of broker is compulsory as trading can only be done by SEBI registered brokers, who are members of a stock exchange.
(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 in the listed securities in electronic form.
(iii) Placing the Order The next step is to place the order with the broker, which can be done through telephone, cell phone, e-mail, etc. Instruction regarding which securities and how many securities are to be bought or sold should be clearly given to the broker.
(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.
Question. The directors of a company want to modernise its plant and machinery by making a public issue of shares. They wish to approach stock exchange, while the finance manager prefers to approach a consultant for a new public issue of shares. Advise the directors whether to approach stock exchange or a consultant for new public issue of shares and why? Also advise about the different methods which the company may adopt for the new public issue of shares.
Ans. I advise the directors to approach a ‘consultant’ as new issue of shares is not possible in stock exchange. Stock exchange is a secondary market, where, only existing securities are traded. For new public issue, primary market or the new issue market is an appropriate place.
Different methods of floatation of new issues of shares are
(i) Offer through prospectus
(ii) Offer for sale
(iii) Right issue
(v) Private placement
Question. What is meant by primary market? Explain any two methods of floating new issues in the primary market.
Ans. Primary market is a market which deals in new securities, being issued for the first time. The important function of a primary market is to facilitate the transfer of investible funds from savers to entrepreneurs, seeking to establish new enterprises or to expand existing ones through issue of securities. There are various methods of flotation of new issues in the primary market, two of which are as follows
(i) Offer through Prospectus Under this method, a company invites 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.
(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 the entire securities en-block at an agreed price to the intermediaries, who, in turn, resell them to the investing public.
Long Answer Type Questions :
Question. Mr. Sahil and Mr. Rajesh are promoting a new company. They are not able to decide on, how to raise funds. Sahil is interested in a new issue through prospectus, while Rajesh wants a right issue.
(i) As a financial manager, suggest Sahil and Rajesh for the appropriate decision.
(ii) Discuss the methods by which securities are issued in the primary market.
Ans. (i) The issue of shares through prospectus is appropriate, as suggested by Sahil, as a new company cannot issue right shares because this can only be done by existing companies.
(ii) There are various methods by which securities are issued in the primary market. They are
(a) Offer Through Prospectus/IPO Under this method, a company invites public to subscribe for its shares through issue of prospectus, which makes a direct appeal to investors to invest in the company, through an advertisement in the newspapers and magazines.
(b) 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.
(c) Private Placement Private placement is the allotment of securities by a company to institutional investors and some selected individuals. It is considered beneficial because it helps to raise funds more quickly than a public issue.
(d) 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 shareholders are offered the right to buy new shares in proportion to the number of shares they already possess. This right is called the pre-emptive right of the existing shareholders.
(e) e-IPO When the public issue is made through an online system of stock exchange, it is known as e-IPO, i.e. electronic Initial Public Offer.
Question. SEBI on Thursday unearthed yet another abuse of IPO norms in the IDFC’s Initial Public Offering (IPO) where a few investors opened over 14,000 dematerialised accounts to corner large number of shares of the company. This is the second such incident, after a similar such violations were detected in the YES Bank’s IPO. SEBI said in IDFC’s IPO too four investors opened as many as 14,807 dematerialised accounts with Karvy-DP and ‘Strangely’, all these account holders have their bank accounts with Bharat Overseas Bank Ltd., Ahmedabad. SEBI order said: “Further probe is required for examining the systemic fault, if any, of the registrar Karvy-RTI, i.e., Karvy Computer Shares P Ltd., and the lead managers Kotak
Mahindra Capital Company Ltd., DSP Merrill Lynch Ltd. and SBI Capital Markets Ltd. in identifying and weeding out the benami applications.” Reference is being made to the RBI
to examine the role of BOB, HDFC Bank, Indian Overseas Bank, ING Vysya Bank and Vijaya Bank in opening the bank accounts of these benami entities and apparently funding them.
(i) What was the reason behind the establishment of SEBI?
(ii) State the development functions of SEBI.
Ans. (i) Before 1988, there was no regulatory body to control the activities at stock exchanges. Therefore, many trading malpractices were taking place. Some of the malpractices included
(a) Price rigging which means manipulation the market price of shares by increasing or decreasing their prices.
(b) The insiders of the company like directors, promoters, etc, used inside information to make personal profits. It is called insider trading.
(c) Unofficial private placements.
(d) Non-adherence of provisions of the Companies Act.
(e) Unofficial premium on new issues.
(f) Delay in delivery of shares. These malpractices needed to be curbed and the investors to be protected from such malpractices. Thus, with the objective of orderly and healthy growth of securities market and for protection of investors, SEBI was established.
(ii) Development functions of SEBI are
(a) Training of intermediaries of the securities market.
(b) Conducting research and publishing information useful to all market participants.
(c) Undertaking measures to develop the capital markets by adopting a flexible approach.
Question. Distinguish between money market and capital market.
Ans. Difference between money and capital market (any six)
|Basis||Money Market||Capital Market|
|Capital arket||It is a market dealing in securities of short-term funds, whose maturity period is upto one year.||It is a market dealing in securities for long-term funds, whose maturity period is more than one year.|
|Participants||Major participants are RBI, commercial banks, financial institutions and finance companies.||Participants of capital market are financial institutions, banks, corporate entities, foreign investors and ordinary retail investors from the members of public.|
|Instruments||Instruments traded are T-bills, commercial bills, certificate of deposits, etc.||Main instruments traded are shares, debentures, bonds, preference shares, etc.|
|Investment Outlay||In money market, instruments require huge sums of money, because these are quite expensive.||It does not require huge capital outlay, as the value of units of securities is generally low, i.e. |
|Duration||They have a tenure of maximum one year and|
may even be traded for a single day.
|Deals with medium term and long-term securities with a maturity period of more than one year.|
|Liquidity||They are highly liquid and have an arrngement for providing liquidity, which is provided by Discount and Finance House of India (DFHI).||They are less liquid, e.g. a person wanting to sell shares may not get a buyer.|
|Risk/safety of Funds||Money market instruments are generally safe due to shorter duration and credibility of issuers.||Capital market instruments are riskier both in terms of returns and repayment of principal.|
|Expected Returns||The expected rate of return is less due to short duration.||The expected returns are high and here is even a possibility of capital gain.|
Question. R Ltd. is a real estate company which was formed in 1950. In about 56 years of its existence, the company has managed to carve out a niche for itself in this sector. Lately, this sector is witnessing a boom due to the fact that the Indian economy is on the rise. The incomes of middle class are rising. More people can afford to buy homes for themselves due to easy availability of loans and accompanying tax concessions.
To expand its business in India and abroad, the company weighs various options to raise money through equity offerings in India. Whether to tap equity or debt market, whether to raise money from domestic market or international market or combination of both? When to raise the necessary finance from money market or capital market? It is also planning to list itself in New York Stock Exchange to raise money through ADRs. To make its offerings attractive, it is planning to offer host of financial plans and products to its stakeholders and investors and also expand its listing at stock exchange, after complying with the regulations of SEBI.
(i) What are the regulations of SEBI that the company must comply with?
(ii) How does the SEBI exercise control over ‘R’ Ltd in the interest of investors?
Ans. (i) Following are the regulations of the SEBI for new issue that the company must comply with
(a) Prospectus has to be attached with every application.
(b) Objective of the issue and cost of project should be mentioned in the prospectus.
(c) Company’s management, past history and present business of the firm should be highlighted in the prospectus.
(d) Subscription list for public issue should be kept open for a minimum of 3 days and maximum of 10 days.
(e) Collections agents are not allowed to collect application money in cash.
(f) Issue should make adequate disclosure regarding the terms and conditions of redemption, security conversion and other relevant features of the new instrument, so that an investor can make reasonable determination of risks, returns, safety and liquidity of the instrument. The disclosure shall be vetted by SEBI in this regard.
(ii) SEBI will exercise control over R Ltd. by
(a) Prohibiting fraudulent and unfair trade practices in the securities market. Unfair trade practices include price rigging, making misleading statements, etc.
(b) Prohibiting insider trading i.e. restricts the persons having access to price sensitive information about the company to take undue advantage of it.
(c) Examining that adequate disclosure about the terms and conditions of redemption, security conversion and other relevant features of the new instrument at the time of issue is made, so that an investor can make reasonable determination of risks, returns, safety and liquidity of the instrument.
Question. Explain the various money market instruments.
Ans. Various instruments available in the money market are
(i) Treasury Bills (T-Bills)
(a) It is a short-term borrowing instrument issued by RBI on behalf of Government of India.
(b) It is also known as zero coupon bonds.
(c) It has a maturity of less than one year.
(d) It is issued at discount and repaid at par. e.g. A treasury bill of face value of ₹ 1,00,000 will be sold at ₹ 96,000 and at the time of maturity the investor will get ₹ 1,00,000. Thus, ₹ 4,000 is the interest received by him.
(e) It is in the form of a promissory note.
(f) It is highly liquid and have negligible risk.
(g) It is available in denominations of ₹ 25,000 and its multiples.
(ii) Commercial Paper
(a) It is issued by large creditworthy companies to raise short-term funds at lower rates of interest than the market rate.
(b) It is an unsecured promissory note, having a maturity of 15 days to one year.
(c) It is a negotiable instrument, transferable by endorsement and delivery.
(d) It is sold at discount and redeemed at par.
(e) It is an alternative to bank borrowing. The original purpose of commercial paper was to meet working capital needs of companies.
(f) It is used by companies for bridge financing, a method of financing used by companies before issuing shares or debentures, to cover the expenses associated with the issue of such securities, i.e. floatation costs (e.g. brokerage, commission, printing of applications, advertising, etc.).
(iii) Call Money
(a) Call money is a method used by commercial banks to borrow funds from each other, in order to maintain the Cash Reserve Ratio (CRR).
Cash Reserve Ratio is the minimum balance of cash to be maintained by banks, according to RBI guidelines.
(b) It is short-term finance repayable on demand.
(c) Maturity of call money is 1 day to 15 days.
(d) The interest paid on call money is called the call rate.
(e) Call rate is highly fluctuating, which varies from day-to-day or even from hour-to-hour.
(f) There is an inverse relationship between call rates and return on other short-term money market instruments. Increase in call rates make the demand for call money decrease, and increase in demand for other short-term instruments, as they become cheaper in relation to call money.
(iv) Certificate of Deposit
(a) It is issued by commercial banks or developmental financial institutions to individuals, institutions, corporations and companies.
(b) It is an unsecured, negotiable instrument in bearer form.
(c) It is issued in periods of tight liquidity, when the deposits by individuals and households is less, but the demand for credit is high.
(d) They help to mobilise large amounts of money in a short time period.
(v) Commercial Bill
(a) It is a bill of exchange used by business firms to meet their working capital needs.
(b) It is a short-term, self-liquidating, negotiable instrument, used for financing credit sales of a firm.
(c) When goods are sold on credit, the seller (drawer) draws a bill of exchange on the buyer (drawee), who accepts it. When he accepts the bill, it becomes a marketable instrument, which is called a trade bill.
When the seller presents it to the bank for discounting it, to get the funds before the maturity of the bill and the bank accepts it, it is called a commercial bill.
Question. Mr. George, an investor from England, wrote a letter to financial advisor of TRILX Ltd. India.
I want to invest £ 12,000 in your company. I believe that after investing in your reputed company, I will receive a good amount of return. In regard to this, I have certain querries please answer the following questions.
(i) How would I invest in your company?
(ii) Explain the procedure that Mr. George is required to go through for making such investment.
Ans. (i) Dear George, our company invites the application through ‘public issue through prospectus’ in which company issues a prospectus to inform and attract general public. In prospectus, company provides the details for which funds are raised past financial performance, background and future prospects of company, which helps in knowing the risk and
earning potential of the company.
(ii) Trading Procedure on a Stock Exchange The following steps are involved in the screen-based trading for buying and selling of securities
(a) 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.
(b) 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.
(c) Placing the Order The next step is to place the order with the broker. The order can be communi- cated 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.
(d) 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
(e) Settlement This is the last stage in the trading of securities done by the brokers on behalf of their clients. Themode of settlement depends upon the nature of the contract. Equity spot markets follow a T+2 rolling settlement. Thismeans that any trade taking place onMonday gets settled byWednesday. Stock exchange operates fromMonday to Friday between 9:55 am and 3:30 pm. Each exchange has its own clearing house, which assumes all settlement risk.
Question. Differentiate between ‘primary market’ and ‘secondary market’ on any five basis.
Ans. Difference between primary and secondary market
|Basis||Primary Market||Secondary Market|
|Nature of Securities||It deals in new issues of securities, issued by new companies or further issue by existing companies.||Existing securities, i.e. securities already sold are traded in stock exchange.|
|Type of Contact with Investor||Securities are issued directly to the investors |
or through intermediaries.
|Ownership of existing securities is exchanged between the investors, where the company is not involved.|
|Capital Formation||It promotes capital formation directly.||It indirectly promotes capital formation by providing liquidity.|
|Buying and Selling||Only buying of securities take place.||Both buying and selling of existing securities take place.|
|Pricing||Prices of securities are decided by the company.||Prices are decided by the demand and supply|
|Location||There is no fixed geographical location.||It is located at specified places.|