Financial Markets Class 12 Notes

Please refer to the  Financial Markets Class 12 Notes for Business Studies given below. These revision notes and important question answers have been prepared based on the latest NCERT book for Class 12 Business Studies. Our teachers have developed these short notes and Important Questions Class 12 Business Studies as per the latest syllabus for Grade 12 Business Studies issued by CBSE. Read these notes and important questions to get better marks in examinations

Class 12 Business Studies Financial Markets

Financial Markets

Financial Market:
Definition A financial market is a market for the creation (new issue of securities) and exchange (sale of existing securities) of financial assets

Financial Markets:
Purpose Financial market serves as an intermediary between the surplus sector (households which have savings) and deficit sector (business firms which needs funds)

Functions of Financial Market
✔ It performs the allocative function
✔ by mobilization of savings and channelizing them into the most productive avenues.
✔ It helps to determine the price for the financial asset in a particular financial market through the market forces of demand and supply.
✔ It provides liquidity to the financial assets by providing ready markets wherein the securities can be easily converted into cash or vice versa.
✔ It provides a common platform for exchange of securities thereby reducing the cost of transactions by saving time, effort and money spent by the buyers and sellers in locating each other

Financial Intermediation

Definition
Financial intermediation refers to the process through which allocation of funds is done by the savers in the household sectors through two main mechanisms; banks and financial markets.

Types / Segments of Financial Market
1. Capital Market
2. Money Market

Capital Market

Capital Market: Definition
Capital Market refers to facilities and institutional arrangements through which long term funds, both debt and equity, are raised and invested.
Capital market is a segment of financial market.

Features of Capital Market
• It is a market for long term funds.
• The main participants in capital market are banks, financial institutions, corporate bodies, foreign investors and retail investors.
• Since the cost of securities may be low, investment can be made in the capital market with less capital.
• The securities in capital market enjoy good liquidity.
• The instruments in capital market carry high risk as the expected return on them is high.

Main Instruments in Capital Market
• Equity Shares
• Preference Shares
• Debentures
• Bonds

Types / Segments of Capital Market
• Primary Market
• Secondary Market

Constituents of the Capital Market
• Development Banks
• Commercial Banks
• Stock Exchanges

Primary Market

Primary Market: Definition
• Primary market is also known as new issue market as the securities are issued for the first time by the companies through this market. Primary Market is a segment of capital market.

Features of Primary Market
• It is the new issue market.
• Only buying of securities takes place.
• Prices of the securities are determined by the company.
• It involves dealings between the company and investors.
• There is no fixed location of primary market.

Instruments of Primary Market
• Shares
• Debentures
• Bonds

Methods of Floatation in Primary Market
1. Offer through Prospectus (The company approaches the members of the general public directly by issuing a prospectus)
2. Offer For Sale (The company approaches members of the general public indirectly through intermediaries like issuing houses, stock brokers etc.)
3. Private Placement (The company can raise finance by allotting securities to selective individuals and institutions only)
4. e-IPOs (The investors may subscribe to the securities of a company online)
5. Rights Issue (It is a pre-emptive right given only to the existing shareholders to subscribe to the securities of the company as per its terms and conditions)

Secondary Market

Secondary Market: Definition
It is a market for old or existing securities
It is a segment of capital market.

Features of Secondary Market / Stock Exchanges
• It is the market for old/existing securities.
• Both buying and selling of securities takes place.
• Prices of the securities are determined by the forces of demand and supply.
• It involves dealings between two investors.
• Stock exchanges exist at fixed location

Money Market

Definition of Money Market
The money market is a market for short term debt instruments whose period of maturity is upto one year.
It is a segment of financial market.

Features of Money Market
• It is a market for short term funds.
• The main participants are institutional investors.
• Since the cost of securities may be high, investment in the money market may require huge capital outlay.
• The money market enjoys high liquidity as The Discount Finance House of India works as a compulsory market maker for it.
• The instruments in money market carry low risk as the expected return is low on

Instruments In Money Market

Call Money	• Call money is a short term money market instrument through which one bank may borrow money from another bank to maintain its cash reserve ratio as per the guidelines of RBI. • It’s maturity period may range from a single day to a fortnight. • The rate at which the interest is paid on call money is called call rate.
Commercial Paper	• Commercial Papers are the short term money market instrument issued by large and credit worthy companies. • The instrument is in the form of an unsecured promissory note and is freely transferable by endorsement. • Its maturity period may range from a fortnight to a year. • It is sold at discount and redeemed at par. • It is used for bridge financing.
Certificate of Deposit	• Certificate of deposit is a short term money market instrument issued by commercial banks and development financial institutions. • It is an unsecured and negotiable instrument in bearer form. • It may be issued to individuals, corporations and companies when banks need cash to meet credit needs
Treasury Bills	• Treasury bills are short term money market instrument which are issued by Reserve bank of India on behalf of the Government of India. • They are issued in the form of promissory notes and are very safe instruments. • They are sold at discount and redeemed at par. • They are also known as zero-coupon-discount bonds. • The minimum value of their purchase is? 25,000 and in multiples thereof.
Commercial Bill	• Commercial bill is a short term money market instrument. • A business firm may draw a bill of exchange in favour of another in lieu of credit purchases. • On acceptance by the drawee (buyer) it becomes a trade bill. • When the trade bill is accepted by a commercial-bank for discounting it is called commercial bill. • A bill of exchange is a freely negotiable instrument. • It is usually drawn for a period of 3 months.

Stock Exchange

Stock Exchange: Definition
According To Securities Contracts (Regulation) Act 1956, “Stock Exchange means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying and selling or dealings in securities.”
Functions of Stock Exchange
✔ Ensures liquidity and marketability of existing securities by a providing a ready and continuous market for the sale and purchase of securities.
✔ Helps in determining the prices of the securities through the forces of demand and supply.
✔ It promotes the habit of saving and investment among the general public.
✔ It provides a legal framework for fair and safe dealings.
✔ It helps the companies in raising finance thus facilitating capital formation and economic growth. It provides scope for healthy speculation in a controlled and restricted way.

Some important Definition

Dematerialization: Definition
Dematerialization refers to the process of holding securities in electronic form.

Depository: Definition
Depository is the organization with which an investor has to open a D-Mat account to hold securities in electronic form.
In India there are two depositories:
1. National Securities Depository Limited (NSDL)
2. Central Depository Services Limited (CDSL)
The depository participant serves as a link between the investor and the depository i.e. either NSDL or CDSL.

Screen Based Trading: Definition
Screen-based trading refers to the process of buying or selling securities on-line.

Advantages of Screen-based Trading
✔ As the investors get an access to the stock market during real time, there is complete transparency and in the dealings.
✔ It provides a common platform for exchange of securities thereby increasing the efficient transactions by saving time, effort and money.
✔ This virtual market has a very wide reach hence it increases its liquidity.

Steps In The Trading And Settlement Procedure
1. The investor approaches a registered broker or sub-broker for trading. The investor has to sign a broker-client agreement and a client registration form.
• The investor has to furnish certain details and information about himself including PAN number which is mandatory, date of birth, bank account details, income details etc.
• A broker acts as an intermediary between the buyers and sellers.
• After the completion of the above formalities, the broker opens a trading account in the name of the investor.
2. The investor has to open a demat account with a depository participant and a bank account for trading transactions in cash.
3. The investor then places an order to buy or sell shares with the broker:
• By giving clear instructions about the desired quantity and price.
• The broker will then make the investor aware about the feasibility of the order.
• The broker will issue an order confirmation slip to the investor.
4. The broker will then execute the order through screen based trading by considering the best available deal.
5. The broker will issue a trade confirmation slip to the investor.
6. Within 24 hours after the deal is executed the broker issues a 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.
• The contract note includes a unique order code generated by the stock exchange for that transaction.
• A contract note is a legal which may be used to settle the claims between the investor and the broker.
7. Since the settlement cycle is T +2 therefore, within two days of receiving the Contract Note, the investor has to pay cash or deliver shares sold as the case may be. The broker can then forward it to the exchange. This is called pay-in-day.
8. On the T+2 day, cash will be paid or shares will be delivered as the case may be by the exchange to the other broker. This is called pay-out-day. Then, in case of sale of shares, the broker has to make the payment to the investor within 24 hours.
9. However, in the case of purchase of securities, the amount will be transferred electronically to the investor’s demat account.

Securities And Exchange Board Of India (Sebi)
The Securities and Exchange Board of India (SEBI) is the regulator for the securities market in India.
1. It was established in the year 1988 by the Government of India. It was to function under the overall administrative control of Ministry of Finance of the Government of India.
2. It was given statutory powers on 30th January 1992 through an ordinance.
3. The ordinance was later on replaced by an Act of Parliament known as the SEBI Act, 1992.

The Organization Structure of SEBI
• The various activities undertaken by SEBI are now divided into five operational departments.
• Each department is headed by an executive director.
• The head office of SEBI is located at Mumbai.
• Besides, regional offices have been set up in Kolkata, Chennai and Delhi to attend to consumers complaints and maintain liaison with the issuers, intermediaries and stock exchanges in the concerned regions.
• SEBI has also formed Primary Market Advisory Committee and Secondary Market Advisory Committee to assist in the process of SEBI’S policies formation.
• These two committees consist of the market players, the investor’s association recognized by SEBI and the eminent persons in the capital market.

Objectives of SEBI
1. To prevent trading malpractice in these securities markets.
2. To protect the rights and interest of investors, and to guide and educate them.
3. 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.
4. To regulate stock exchanges and the securities market to promote their orderly functioning.

Purpose and Role of SEBI
SEBI has to be responsive to the needs of three groups, which constitue the market namely:
• The issuers of securities so as to provide them a platform for raising capital in an easy, effective and efficient manner.
• The investors so as to protect their interests in securities by keeping them abreast about the developments through true and appropriate information.
• The market intermediaries in order to provide them a framework so as to enable them to perform their functions effectively and efficiently.

Objectives of Advisory Committees Formed by SEBI
1. To advise SEBI on matters relating to regulation of intermediaries for ensuring investor protection in the primary market.
2. To advise SEBI on issues related to development of primary market in India.
3. To advise SEBI on matters required to be taken by for changes in legal framework to introduce simplification and transparency in the primary market.
4. To advise SEBI on disclosure requirements for companies.
5. To advise the board in matters relating to the development and regulation of secondary market in the country.

Functions Of Sebi

Protective Functions of SEBI
• SEBI prohibits fraudulent and unfair trade practices in the securities market
• Promotion of fair practices and code of conduct in securities market
• Undertaking steps for investor protection
• Controlling insider trading and imposing penalties for such malpractices.
The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as “…to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”

Developmental Functions of SEBI
1. Ensuring training of intermediaries of securities market
2. Conducting research and publishing information useful to all market participants
3. Facilitating flexibility in the working of capital markets.

Regulatory Functions of SEBI
✔ Registration and regulation of brokers, sub-brokers and other players in the financial market.
✔ Registration of collective investment schemes and Mutual Funds.
✔ Conducting enquiries and audits of stock exchanges & intermediaries.
✔ Regulation portfolio exchanges, underwriters, merchant bankers and the dealings in the stock exchanges.
✔ Regulation of takeover bids by the companies

Case Study Financial Markets Class 12 Business Studies

Question. Meca Ltd. a reputed automobile manufacturer needs Rupees ten crores as additional capital to expand its business. Atul Jalan, the CEO of the company wanted to raise funds through equity. On the other hand the Finance Manager, Nimi Sahdev said that the public issue may be expensive on account of various mandatory and non-mandatory expenses. Therefore, it was decided to allot the securities to institutional investors. Name the method through which the company decided to raise additional capital.
Ans. Private placement is method through which the company decided to raise additional capital.

Question. These days, the development of a country is also judged by its system of transferring finance from the sector where it is in surplus to the sector where it is needed most. To give strength to the economy, SEBI is undertaking measures to develop the capital market. In addition to this there is another market in which unsecured and short-term debt instruments are actively traded everyday. These markets together help the savers and investors in directing the available funds into their most productive investment opportunity.
1. Name the function being performed by the market in the above case.
2. Also, explain briefly three other functions performed by this market.
Ans. 1. Mobilisation of funds is the function being performed by the financial market in the above case. It performs the allocative function by mobilisation of savings and channelising them into the most productive avenues.
2. The other three functions being performed by the financial market are outlined below:
✔ It helps to determine the price for the financial asset in a particular financial market through the market forces of demand and supply.
✔ It provides liquidity to the financial assets by providing ready markets wherein the securities can be easily converted into cash or vice versa.
✔ It provides a common platform for exchange of securities thereby reducing the cost of transactions by saving time, effort and money spent by the buyers and sellers in locating each other.

Question. These days, the development of a country is also judged by its system of transferring finance from the sector where it is in surplus to the sector where it is needed the most. To give strength to the economy, SEBI is undertaking measures to develop the capital market. In addition to this, there is another market in which unsecured and short-term debt instruments are actively traded every day. These markets together help the savers and investors in directing the available funds into their most productive investment opportunity.
1. Name the function being performed by the market in the above case.
2. Name the market segment other than the capital market segment in which unsecured and short-term debt instrument are traded. Also, give any three points of difference between the two
Ans. 1. Mobilization of funds is the function being performed by the financial market in the above case. It performs the allocative function by mobilization of savings and channelizing them into the most productive avenues.
2. Money market is the other segment of market.

S.NO	Basic	Capital Market	Money Market
1	Participants	The main participants in capital market are banks financial institutions corporate bodies foreign investors and retail invertors	The main participants are institutions investors
2	Investment outlay	Since the cost securities may be low investment can be made in the capital market can be with less capital	Since the cost securities may be low investment in the money market requires huge capital outlay
3	Liquidity	The securities in capital market enjoy good liquidity	The securities in money market enjoy high liquidity as the discount finance house of India works as a compulsory market maker

Question. ABC Ltd. issued prospectus for the subscription of its shares for Rs. 500 crores in 2008. The issue was oversubscribed by 20 times. The company issued shares to all the applicants on pro-rata basis. Later SEBI inspected the prospectus and found some misleading statement about the management of the company in it. SEBI imposed a penalty of Rs. 5 crores and banned its three executive directors for dealing in securities market for three years. Identify the function and its type performed by SEBI in the above case.
Ans. Protective function has been performed by SEBI in the above case. And the type of Protective function is Prohibition of fraudulent and unfair trade practices.

Question. “Unicon Securities Pvt. Ltd” was established to deal in securities. It was registered as a stock broker with National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) to trade in securities listed at these exchanges. It is also a depository participant with CDSL and NSDL. In the first three years, it developed its business successfully. After that the composition of Board of Directors changed. Some customers complained to the customer care centre of the company that shares purchased by them and for which the payment has been duly made, were not transferred to their D’mat Accounts by“Unicon securities Pvt. Ltd” . The executive of customer care centre promised the aggrieved customers that their shares will be transferred to their respective D’mat Accounts very soon. But the company delayed the matter and didn’t transfer the shares of the customers to their D’mat Accounts. This eroded investors confidence and multiplied, their grievances.
1. Identify the step of trading procedure in a stock exchange which has not been followed by “Unicon Securities Pvt. Ltd” .
2. Name the Apex statutory body of capital market to whom customer can complain to redress their grievances.
3. Write two values not followed by Unicon Security Pvt. Ltd.
Ans. 1. 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.
2. 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.
3. The two values not followed by Unicon Security Pvt. Ltd are’:
✔ Truthfulness
✔ Fair practices

Question. Reshu’s father has gifted her the shares of a large cement company with which he had been working. The securities were in physical form. She already has a bank account and does not possess any other forms of securities. She wished to sell the shares and approached a registered broker for the purpose. Mention one mandatory detail which she will have to provide with the broker. 
Ans. Reshu will have to give her Permanent Account Number (PAN) to the broker as it is mandatory as per law.