AHSEC - 12: Financial Markets Important Notes for March 2022 - 23 Exam | Business Studies Class 12 Notes

[AHSEC Class 12, Business Studies Notes, Revised Syllabus, 2022 Exam, Financial Markets]

Class 12 Business Studies Notes
Unit – X: Financial Markets

OBJECTIVE QUESTIONS (1 mark)

1. What is a financial market? Mention its components.

Ans: It refers to the market which creates and exchanges financial assets. It is divided into two parts: Money market and capital market.

2. What are financial assets?

Ans: It refers to the financial instruments or securities. For e.g. shares, debentures, treasury bills, commercial paper etc.

3. What is floatation cost?

Ans: The expenditure incurred in issuing the securities is called floatation cost.

4. Mention two methods of floating securities by a company.

Ans: Initial Public offer, Books building method

5. What are the components of capital market?

Ans: Primary market or New issue market and Secondary Market and Stock exchange.

6. Name the market where new securities are issued for the first time.

Ans: Primary Market or new issue market

7. Name the market which facilitates purchases and sale of old or existing securities.

Ans: Secondary Market or stock exchange

8. What is a zero coupon bond?

Ans: It is a financial instrument for which no interest is paid but is issued at a discount redeemable at par.

9. What type of trade-off function is performed by the money market?

Ans: The money market establishes a balance between short term financial supply and short term financial demand.

10. Name the instruments that are traded in money market.                      2013

Ans: Call money, Commercial Papers, Certificates of deposits, Bills of exchange.

11. Name the instruments that are traded in capital market.

Ans: Stocks, Shares, Debentures, Bonds, GDR (Global Depository receipts)

12. Name the institutions operating in the money market.

Ans: Central Bank, Commercial banks, Non-bank financial institutions.

13. Name the institutions operating in the capital market.

Ans: IDBI, IFCI, ICICI, Stock exchanges.

14. In which year NSEI, BSE and OTCEI were established?                            2015, 2018

Ans: NSEI – In 1991 and BSE – In 1875. But, NSEI was recognized in 1992. OTCEI was established in 1990.

15. With which stock exchanges the Benchmark ‘Sensex’ and ‘nifty’ are associated?

Ans: Bombay stock exchange – Sensex, National Stock exchange - nifty

16. Which is the oldest stock exchange in India?

Ans: Bombay stock exchange

17. Mention the statutory body for regulation of stock exchanges in India.

Ans: SEBI (Securities and Exchange Board of India)

18. When was SEBI established?                                              2017

Ans: It was established in 1988 but was given statutory status in 1992.

19. State the segments of NSEI.

Ans: a) Wholesale debt market b) Capital market segment

20. State one development function of SEBI

Ans: to carry out research work.

21. Money market is a market for short terms funds i.e. for one year and capital market is a market for long term funds i.e. for more than one year.

Ans: Given statement is true.

22. What are various types of operators in stock exchange?

Ans: Brokers, jobbers, bulls, bears and stag.

23. Write the full form of NSEI, BSE and OTCEI.

Ans: NSEI – National stock exchange of India (Nifty), BSE – Bombay Stock Exchange (Sensex), OTCEI – Over the Counter Exchange of India.

24. State two promoters of NSEI.

Ans: a) Industrial development bank of India (IDBI) b) Life insurance corporation of India (LIC)

25. How many stock exchanges are there in India?

Ans: There are 24 recognised stock exchanges in India. Whereas at national level there are two major stock exchange. These are: a) NSEI and b) OTCEI.

26. Name two advisory committees set up by SEBI.

Ans: a) Primary market Advisory committee. b) Secondary market advisory committee.

27. Mention some specific features of Treasury bills.

Ans: Treasury bill: It is also known as zero coupon bonds as no interest is paid.

28. Name two buyers of Commercial paper.

Ans: a) Banks b) Insurance companies.

29. What is meant by “Near Money?”

Ans: All very short term securities are called near money for e.g. marketable securities.

30. What is price rigging?

Ans: It refers to the manipulation of prices of the securities by agents/company for their own profits.

31. On what lines was OTCEI started?

Ans: It was started on the lines of NASDAQ (National Association of securities Dealers Automated Quotation)

32. Name the system where there is electronic book entry form of holding and transferring the securities.

Ans: Dematerialisation.

33. What is ‘Demutualisation of securities?’

Ans: It separates the ownership and control of stock exchanges from trading rights.

34. State four features of Commercial paper.

Ans:  a) Commercial paper is debt instrument issued for a period of 15 days to one year

b) These are issued in the form of unsecured promissory note.

c) These are transferable by mere endorsement and delivery.

d) These are issued by large and creditworthy companies.

35. State three features of Treasury bills.

Ans: a) Treasury bills are instruments of money market issued by the Government of India. They are freely transferable.

b) They are issued in the multiples of 25000.

c) These are in the form of Zero coupon bond that is issued at a discount redeemable at par. No interest is given on such securities.

36. What is Sensex and Nifty?

Ans: Sensex: It is a Market Capitalisation Weighted index of 30 stocks representing a sample of large, well-established and financially sound companies. It is the oldest index in India.

Nifty: It is diversified weighted index of 50 stock from 23 sectors of the economy. It is used for benchmarking fund portfolios, index based derivatives and index funds.

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ALSO READ (AHSEC ASSAM BOARD CLASS 12)

1. AHSEC CLASS 12 BUSINESS STUDIES CHAPTERWISE NOTES

2. AHSEC CLASS 12 BUSINESS STUDIES QUESTION PAPERS (FROM 2012 TILL DATE)

3. AHSEC CLASS 12 BUSINESS STUDIES SOLVED QUESTION PAPERS (FROM 2012 TILL DATE)

4. AHSEC CLASS 12 BUSINESS STUDIES IMPORTANT QUESTIONS

5. BUSINESS STUDIES MCQs

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SHORT AND LONG ANSWERS TYPE QUESTIONS (5/8 marks)

Q.N.1. What is financial market? What are its components? Mention its functions.                        2015

Ans: Meaning of Financial Market: Financial market is simply a link between the savers and borrowers. It can be defined as an institution that facilitates exchange of financial instruments and credit instruments such as cheques, bills, deposits, loans, corporate stocks, government bonds, etc. The main participants of financial markets are financial institutions, agents, dealers, brokers, borrowers and savers.

According to Brigham "The place where people and organizations wanting to borrow money, are brought together, with those having surplus funds is called a financial market".

This definition makes it clear that a financial market is a place where those who need money and those who have surplus money are brought together. They may come together directly or indirectly through brokers and dealers.

Types of Financial Markets (sub-markets)        

Every firms, individuals and institutions need finance for its expansion and day to day operating activities. Financial needs may be of two types – short term or long term. Based on these needs, financial markets are divided into two categories:

a) Money market – Market for short term funds

b) Capital market - Market for long term funds               

Role and Functions of financial market

a) Mobilisation of savings: Financial market encourages savings habits amongst the individuals. It mobilizes savings of savers into most appropriate uses.

b) Channelization of savings: It meets the various credit needs of the business houses by channelizing the savings of savers towards the entrepreneurs.

c) Liquidity: It provides liquidity of financial assets by providing ready market for buying and selling of securities.  Securities can be easily converted into cash in financial market.

c) Price discovery: It facilitates price discovery. Prices of securities in financial market are decided by the forces of demand and supply of financial assets in financial market.

e) Economic development: It assists in the process of economic development of a country. it helps in balanced regional and sectoral distribution of investible funds.

Q.N.2. What is money market? Explain its nature and functions.                              2015, 2018, 2020

Ans: Money market is a place where money and short term financial assets which are close substitutes of money are traded. It mainly deals in cash or near money or liquid assets of short-term nature. It also deals in treasury bills (TBs), Commercial bills, Commercial paper (CP), ADRs, GDRs, Call and Short money market etc.

According to the RBI, "The money market is the centre for dealing mainly of short character, in monetary assets; it meets the short term requirements of borrowers and provides liquidity or cash to the lenders. It is a place where short term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the government."

From the above explanation, we can say that money market is a market for short term funds meant for use for a period of one year or less. The major participants of money market consist of the government, commercial banks, Life insurance companies, Mutual funds, Non-banking finance companies, stock exchange brokers etc.

Features of Money Market: The salient features of money market are as follows: 2020

a)      Flow of short-term funds: The money market brings together the lenders who have surplus funds for short-term and the borrowers who are in need of short-term funds.

b)      No fixed geographical location: There is no fix geographical location of money market. Different name is given to money market located in different areas.

c)       Participants: The major participants of money market consist of the government, commercial banks, Life insurance companies, Mutual funds, Non-banking finance companies, stock exchange brokers etc.

d)      Instruments:  It deals in money or instruments which are a close substitute of money such as treasury bills (TBs), Commercial bills, Commercial paper (CP), ADRs, GDRs, Call and Short money market etc.

e)      Sub-markets or components: Money market consists of many sub-markets such as call money market, collateral loan market, acceptance market, bill market, treasury bills market etc.

f)       Reasonable access: Money market provides reasonable access to users of short-term funds to meet their requirements on reasonable terms or rates of interest.

g)      Source of working capital: Money market constitutes a major source of working capital finance for borrowers.

Significance/Functions of Money Market

The major functions of money market are given below:

(a)    Economic Development: The money market helps in economic development of a country by providing short term funds to both public and private institutions without any discrimination.

(b)   Funds for government: Money market helps the government in borrowing short term funds at very low interest rate. This can be done by issuing treasury bills.

(c)    Return on idle funds: Money market helps the lenders to earn return on their idle or surplus funds for short period.

(d)   Implementation of Monetary Policy: Money market helps in implementing monetary policy of the central bank of any country.

(e)   Mobilisation of funds: The money market helps in transferring funds from one sector to another. The development of trade, commerce and industry depends on the mobilisation of financial resources.

(f)     Connecting link between various financial market: Money market acts as a connecting link between all the segments of financial market like capital market, foreign exchange market etc.

Q.N.3. Explain the various Money market instruments.  2013, 2015, 2017

Ans: Money market is the short term security market. Following are the instruments dealt in money market.

a) Treasury bills: T-bills short term government security ranging from 14 days to 364 days issued by RBI on behalf of the government to meet its short-term financial needs. No fixed interest in payable on Treasury bills. Normally TBs are issued at the lowest interest rate agreed on competitive bidding. These bills are negotiable instruments and freely transferable.

b) Commercial Paper: Commercial papers are unsecured promissory notes issued by highly creditworthy companies to raise funds for short term. It usually has a maturity period of 15 days to one year. CPs are normally issued at a discount and redeemed at par.  The commercial banks and mutual funds are the main investors of commercial papers.

c) Call money and short notice money: Call money refers to money given for a very short period ranging from 1 day to 7 days. Surplus funds of the commercial banks and other institutions are usually given as call money. Banks are the borrowers as well as lenders for the call funds. If the loan is given for one day and can be called back on demand, it is called money at call but if the loan cannot be called back on demand and will require 3 days notice, it is called money at short notice. Money at short notice can be of maximum 14 days.

d) Certificate of deposit (CD): Certificate of deposit is a time deposit having a maturity period from 91 days to 12 months. CDs are issued only by a bank. It is a bearer certificate which is freely transferable and can be sold in secondary market. Banks are not allowed to discount these documents.

e) Commercial bills: These are the trade bills which are drawn at the time of credit sales by the Drawer (Supplier) and accepted by the Drawee (Debtor). It is an acknowledgment of debt normally having a maturity period of 90 days. It is a negotiable instrument and can also be endorsed from one person to another.  It can also be discounted with the bank before maturity.

Q.N.4. What is Capital Market? What are its components? Explain its importance.                          2016

Ans: Capital Market is generally understood as the market for long-term funds. This market supplies funds for financing the fixed capital requirement of trade and commerce as well as the long-term requirements of the Government. The long-term funds are made available through various instruments such as debentures, preference shares and equity shares. The capital market can be local, regional, national, or international. 99, 04, 08,09,11,14

The capital market is classified into two categories (Components), namely,

(i)      Primary market or new issue market, and

(ii)    Secondary market or stock exchange.

Features of Indian Capital Market                           2015, 2018, 2020

a)      Dealing in Securities: It deals in long-term marketable securities and non-marketable securities.

b)      Segments: It included both primary and secondary market. Primary market is meant for issue of fresh shares and secondary market facilitates buying and selling of second hand securities.

c)       Investors: It includes both individual investors and institutional investors such as Mutual funds, banks, Insurance companies etc. It also includes foreign institutional investors.

d)      Link between savers and investment opportunities: Capital market is a crucial link between saving and investment process. It facilitates flow of long term capital from those who have surplus capital to those who need capital.

e)      Intermediaries: It acts through intermediaries which includes bankers, brokers, underwriters etc.

f)       Government rules and regulations: The capital market operates freely but under the guidance of government policies. These market functions within the framework of government rules and regulations.

Importance of Capital Market

a)      Availability of funds: Capital market helps to raise long term funds from both domestic and as well as foreign institutional investors.

b)      Mobilization of savings: Capital market mobilizes the savings of individuals and institutions to productive channels. It facilitates flow of long term capital from those who have surplus capital to those who need capital.

c)      Industrial growth: it plays a significant role in the economic development of a country. It facilitates increase in production and productivity in the economy and hence enhances the economic welfare of the society.

d)     Liquidity: It provides liquidity to investors in capital market. The securities issued through the primary market are traded in the secondary market which provides liquidity to the investors and also short-term as well as long-term yields on their investments.

e)      Balance between demand and supply: It bring about balance between demand and supply of capital by creating a link between those who demand capital and those who supply capital.

f)       Attracting foreign capital: Capital market helps in attracting foreign investments. The Indian capital market provides the channel through which foreign institutional investors and NRIs ca invest their funds in the securities of Indian companies.

Q.N.5. Distinguish between Capital market and Money market.  2012, 2014, 2018, 2019, 2020

Ans: Difference between capital market and money market

Basis of  Distinction

Capital Market

Money Market

1)   Period

Capital market is a market for medium and long term funds.

Money market is a market for short term funds.

2)   Constituents

These include new issue market, stock market, stock brokers and intermediaries.

These include call money market, bill market and discounting market.

3)   Participants

Individual and institutional investors operate in the capital market.

Only the institutional investors operate in the money market.

4)   Instruments

The instruments in the capital market include shares, debentures, bonds etc.

Trade bills, certificate of deposits, commercial papers etc. are the instruments of money market.

5)   Liquidity

The instruments of capital market always take time to convert into cash.

The instruments of money market have very high degree of liquidity.

6)   Safety

Investments are unsecured due to high volatility in market.

Investment are safe as compared to capital market.

7)      Regulation

Capital market is primarily regulated by the Securities and Exchange Board of India (SEBI)

Money market is regulated by the Reserve Bank of India (RBI)

Q.N.6. What is primary and secondary market? State four differences between primary market and secondary market. 2013, 2014, 2017

Ans: Primary market (2014,2016) which is also called new issue market represents a market where new securities i.e. shares, debentures and bonds that have never been previously issued are offered. It is a market of fresh capital. The main function of this market is to facilitate the transfer of funds from willing investors to the entrepreneurs who need funds. but with the changing time, the nature of primary market is also changing. There exist two types of primary market:

a)      Market where firms issue securities for the first time through Initial Public Offer (IPO).

b)      Market where firms which are already trading in secondary market raise additional capital through Seasoned Equity Offering (SEO).   

Secondary market also called stock exchange represents a market where existing securities i.e. shares and debentures are traded. Its main function is to create a link between the buyers and sellers of securities so that investments can change hands in the quickest and cheapest manner.

According to Securities Contract (Regulation) Act, 1956, the term stock exchange has been defined as, “an association, organisation or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.”

Thus, a stock market is a market where dealings in the listed securities are made by the members of the exchange on their own behalf or on behalf of others.

From the above explanation it is clear that there are some differences between primary and secondary market which are given below:

Basis

Primary Market

Secondary Market

1. Meaning

It is the market where the securities are issued for the first time. It is also referred as New issue market.

It is the market where the existing securities are traded. It is also called stock Exchange.

2. Price determination

The prices of the securities are determined by the company.

The prices of the securities are determined by the forces of demand and supply of the securities.

3. Buying and selling

Here, only buying of the securities take place.

Here, buying and selling of the securities, both take place.

4. Participants

 Securities are sold by the company directly to the investors.

Securities are traded by the investors. Company is not involved in trading.

5. Purpose

Purpose of primary market is to provide capital for setting new business.

The main purpose of secondary market is to provide liquidity to the investors.

6. Capital formation

Primary market promotes capital formation directly.

Capital market promotes capital formation indirectly.

Q.7. What is stock exchange? Mention its features. “Stock exchange is the barometer of the economy” In the light of the statement, discuss the functions of the stock exchange.              2012, 2016, 2020

Ans: STOCK EXCHANGE (2013): A stock exchange is highly organised financial market where the second hand securities can be bought and sold. Its main functions are to create a link between the buyers and sellers of securities so that investments can change hands in the quickest, cheapest and fairest manner. Under the Securities Contract (Regulation) Act, 1956, the term stock exchange has been defined as “as association, organisation or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities”.                

FEATURES OF STOCK EXCHANGE

The important features of stock exchange are as follows:

a)      Stock exchange is a market where dealings take place in shares, debentures and bonds issued by the company’s corporations, government, etc.

b)      Only those securities could be traded that are included in the official list of stock exchange.

c)       It also deals in government securities.

d)      Stock exchange is organisation in the form of an association or a company or a body of individuals.

e)      It is a common meeting place of buyers and sellers of second hand securities.

f)       In stock exchanges, brokers serve as a link between the buyers and sellers.

g)      Stock exchanges frame their rules and regulations.

h)      The areas of operations of stock exchange or geographical jurisdiction is well defined.

i)        In India, stock exchanges operate as per guidelines issued by the Securities and Exchange Board of India.

Functions of stock exchange                     

As the barometer measures the atmospheric pressure, the stock exchange measures the growth of the economy. It performs the following vital functions:

1.       Ready market and liquidity: Stock exchange provides a ready and continuous market where investors can convert their money into securities and securities into money easily and quickly. It provides a convenient meeting place for buyers and sellers of securities.

2.       Evaluation of securities: Stock exchange helps in determining the prices of various securities that reflect their real worth. The forces of demand and supply act freely in the stock exchange and help in the valuation of securities.

3.       Mobilisation of savings: Stock exchange helps in mobilising surplus funds of individuals and institutions for investment in securities. In the absence of facilities for quick and profitable disposal of securities, such funds may remain idle.

4.       Capital formation: Stock exchange not only mobilises the existing savings but also induces the public to save money. It provides avenue for investment in various securities which yield higher returns. It helps in allocation of available funds into the most productive channels.

5.       Regulation of corporate sector: Stock exchanges frame their rules and regulations. Every company which wants its securities to be dealt in at the stock exchange has to follow the rules framed by the stock exchange in this regard.

6.       Economic barometer: Stock exchange is very sensitive barometer of business conditions in the country. Booms, depressions and other important events affect prices of securities. Price trends on the stock exchange reflect the economic climate in the country. One can easily analyse the cause of change in the business climate by the ups and downs on the stock exchange.

7.       Encourages Industrialization: The stock exchange provides capital to industry and commerce. They provide finance to the Govt.

8.       Helps government in the Policy Formulation: All the government policies have their clear reflection on the national science through stock exchange whether they are economic policies or monetary or fiscal.

Q.N.8. Explain the services provided by Stock Exchanges.

Ans: SERVICES PROVIDED BY EXCHANGES: Stock exchanges provide services to investors, corporate sector and the society. These services are discussed as follows:

(a) Services to Investors

a)      Information about Securities. Stock exchanges provide information such as the securities listed their, the prices at which traded, the list of authorised brokers etc. The investors can take investment decisions after studying that information.

b)      Offering Liquidity for Securities. The exchange provide ready market for purchasing and selling of securities. Any investor needing cash can sell his shares at the exchange.

c)       Protection Against Exploitation. The exchanges prescribe various rules and regulations under which trading is to be done. The investors are provided protection under various rules and regulations. They can also approach exchange authority if investors feel aggrieved on any account.

d)      Better Use of Funds. Exchanges provide a mechanism for investors for making better use of their funds. The investors are provided proper information about the companies in whose shares the investor wants to invest.

e)      Protection from Bad Deliveries. The securities are listed after proper scrutiny only. It prevents trading in duplicate or forged securities.

(b) Services to Corporate Sector

a)      Providing Market for New Securities. A stock exchange provides a wide market for trading of securities. The securities can be listed and then traded at the exchanges. It provides an opportunity to companies to raise funds for capital issues.

b)      Increases Goodwill of the Company. The listing of a security at an exchange adds goodwill to the company. The securities are listed only after the scrutiny of financial position of a company.

c)       Helps in Growth of Companies. The stock exchanges provide ready markets for the purchase and rate of securities. Besides new companies, the existing companies also need to issue shares at the time of expansion and diversification. The facility of raising funds encourages the growth of corporate sector.

d)      Creating Confidence in Investors. Those who invest in shares are confident of getting a ready market for their securities. The exchanges provide liquidity to securities. When investors are not sure of getting ready market for their shares then they will hesitate to invest.

e)      Financial Information Available. The corporate sector can get information regarding trends of investment, investors, choice and priorities etc. from stock exchanges on regular basis. On the basis of his information, companies can plan their future issue.

(c) Services to Society

a)      Investment Opportunities. Stock exchanges provide opportunities for investing surplus funds to general public. Anybody can invest in shares or other securities whenever they have funds. The securities can be sold through the exchanges on the choice of the investors.

b)      Productive Use for Funds. The exchanges provide a productive channel for investment of funds. The amount invested in shares is used for setting up new units or for expanding and diversifying existing ones. This is the best productive use of surplus funds.

c)       Pulse of Economy. The business transacted at the exchanges and the indexes of prices show the growth of the economy in any country. The fluctuations in prices at exchange help in understanding the pulse of the economy.

d)      Investments in Foreign Securities. The shares of good foreign companies are also traded at stock exchanges. Those who are interested in investing in foreign securities can safely invest through stock exchanges. The investments will be safe since shares of genuine companies are traded at exchanges.

Q.N.9. “SEBI is the watchdog of the securities market” Do you agree? Give four reasons to support your Answer.  2013, 2014, 2018, 2020              

Ans: SECURITIES AND EXCHANGE BOARD OF INDIA: With the growth in the dealings of stock markets, lot of malpractices also started in stock markets such as price rigging, ‘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). Securities Exchange Board of India (SEBI) was set up in 1988 but legal status is granted in May 1992. SEBI is a body corporate having a separate legal existence and perpetual succession.

Purpose and Role of SEBI: SEBI was set up with the main purpose of keeping a check on malpractices and protect the interest of investors. It was set up to meet the needs of three groups.

1. Issuers: For issuers it provides a market place in which they can raise finance fairly and easily.

2. Investors: For investors it provides protection and supply of accurate and correct information.

3. Intermediaries: For intermediaries it provides a competitive professional market.

Functions of SEBI: The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three important functions. These are:

i. Protective functions                                    2018

ii. Developmental functions                        2018

iii. Regulatory functions.

1. Protective Functions: These functions are performed by SEBI to protect the interest of investor and provide safety of investment. As protective functions SEBI performs following functions:

(i) It Checks Price Rigging. SEBI prohibits such practice because this can defraud and cheat the investors.

(ii) It Prohibits Insider trading. SEBI keeps a strict check when insiders are buying securities of the company and takes strict action on insider trading.

(iii) SEBI prohibits fraudulent and Unfair Trade Practices. SEBI does not allow the companies to make misleading statements which are likely to induce the sale or purchase of securities by any other person.

(iv) SEBI undertakes steps to educate investors so that they are able to evaluate the securities of various companies and select the most profitable securities.

(v) SEBI promotes fair practices and code of conduct in security market by taking following steps:

(a) SEBI has issued guidelines to protect the interest of debenture-holders wherein companies cannot change terms in midterm.

(b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine and imprisonment.

(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to market prices.

2. Developmental Functions: These functions are performed by the SEBI to promote and develop activities in stock exchange and increase the business in stock exchange. Under developmental categories following functions are performed by SEBI:

(i) SEBI promotes training of intermediaries of the securities market.

(ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable approach in following way:

(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.

3. Regulatory Functions: These functions are performed by SEBI to regulate the business in stock exchange. To regulate the activities of stock exchange following functions are performed:

(i) SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries such as merchant bankers, brokers, underwriters, etc.

(ii) These intermediaries have been brought under the regulatory purview and private placement has been made more restrictive.

(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents, trustees, merchant bankers and all those who are associated with stock exchange in any manner.

(iv) SEBI registers and regulates the working of mutual funds etc.

(v) SEBI regulates takeover of the companies.

(vi) SEBI conducts inquiries and audit of stock exchanges.

Q.N.10. State five objectives of SEBI.  2012, 2014

Ans: Objectives of SEBI: The overall objectives of SEBI are to protect the interest of investors and to promote the development of stock exchange and to regulate the activities of stock market. The objectives of SEBI are:

a) To regulate stock exchanges and the securities industry and to promote their orderly functioning.

b) To protect the rights of investors and ensuring safety to their investment.

c) To prevent fraudulent and malpractices by having balance between self regulation of business and its statutory regulations.

d) To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.

e) To Regulate Mutual fund agencies and collective Investment schemes.

Q.N. 11. State three objectives of NSEI.                                2019

Ans:  National Stock Exchange of India was established in 1992 and started working in 1994. The main objectives of NSE was stated below:

a) To ensure equal access to investors all over the world.

b) To provide fair, efficient and transparent trading of the securities electronically.

c) To provide facilities of international standards.

d) To enable shorter settlement cycles and book entry settlement.

e) To provide nationwide trading facility for all types of securities.

Q.N.11. State three advantages of OTCEI.

Ans:  Over the counter exchange of India (OTCEI) was incorporated in 1990 but trading was started in 1992. It is established on the lines of NASDAQ and promoted by UTI, IDDI and LICI. It was established with the object to provide electronic trading facility to small investors.

Advantages of OTCEI

a) To provide a trading platform to smaller and less liquid companies.

b) It is economical in nature as it involves low cost of new issue.

c) It is a transparent system of trading with no problems of bad deliveries.

d) it is suitable for family concerns and closely held companies.

Q.N.12. State the common features of NSEI and OTCEI.

Ans: The common features of NSEI and OTCEI are:

a) Nationwide coverage

b) Screen based trading

c) Transparency in transactions

d) Incorporated entities backed by financial institutions.

Q.N.13. Explain the trading procedure on NSEI. OR Explain the procedure of trading on the stock exchange.

Ans: The selling and the buying process of securities on the NSEI are as under:

a) Placing the order: First of all, the person buying or selling the security places an order. He mentions the company whose securities are to be traded, quantity and time period.

b) Conveying the message to computer: As soon as the terminal operator receives the order from the customer, he feeds it on the computer. All the terminal operators simultaneously feed their orders online.

c) Matching: The computer matches the orders. Whenever the computer matches a suitable buying and selling order, it shows the list on the computer.

d) Accepting the order: After obtaining the correct match, the order is accepted by both the parties.

e) Delivery and payment: After the transaction is settled, it payment is done as per the regulations of NSEI.

Q.N.14. Distinguish between NSEI and OTCEI.

Ans: Difference between NSEI and OTCEI

Basis

NSEI

OTCEI

Establishment

It was established in 1992 and started working in 1994.

It was established in 1990 but trading was started in 1992

Objective

Nationwide transparent exchange for capital as well as money market.

A nationwide transparent exchange for small companies.

Paid up capital

Paid up capital of NSEI is Rs. 3 crores.

Paid up capital of OTCEI is Rs. 30 lakhs.

Securities traded

All securities of capital and money market are traded.

Only capital market securities are traded.

Q.N.15. Explain various mode of raising capital in the Primary Market.

Ans: Mode of raising capital in the Primary market

1.       Public issue/Prospectus: Securities are issued to the general public. This is the most popular method of raising long term fund. In this method securities are offered to the public by issuing prospectus.

2.       Right issue: The equity shares of a company are issued to the existing equity shareholders in the form of right issue. In this issue additional securities are offered to the existing shareholders.

3.       Private placement: Under private placement the shares of a company are sold among the selected group of persons.

4.       Offer for Sale Method: Under this method, instead of offering shares directly to the public by the company itself, it offers through the intermediary such as issue houses / merchant banks / investment banks or firms of stock brokers.

5.       Other Methods of Issuing Securities: Apart from the above methods, there are some other methods of issuing securities. They are:

a.       Tender method: Under tender method, the issue price is not predetermined. The company announces the public issue without indicating the issue price. It invites bids from various interested parties. The parties participating in the tender submit their maximum offers indicating the maximum price they are willing to pay. They should also specify the number of shares they are interested to buy. The company, after receiving various offers, may decide about the price in such a manner that the entire issue is fairly subscribed or sold to the parties participating in the tender.

b.      Issue of bonus shares: Where the accumulated reserves and surplus of profits of a company are converted into paid up capital, it is called bonus issue. It simply refers to capitalization of existing reserves and surpluses of a company.

c.       Offer to the employees: Now a days companies issue shares on a preferential basis to their employees (including whole time directors). This attracts, retains and motivates the employees by creating a sense of belonging and loyalty. Generally shares are issued at a discount. A company can issue shares to their employees under the following two schemes: (a) Employee stock option scheme and (b) employee stock purchase scheme.

d.      Offer to the creditors: At the time of reorganization of capital, creditors may be issued shares in full settlement of their loans.

e.      Offer to the customers: Public utility undertakings offer shares to their customers.

Q.N. 16. Mention various types of operators in stock exchange.

Ans: Types of operators in Stock Exchange

1. Brokers: A broker is a member of the stock exchange who buys and sells securities on behalf of investors. He charges brokerage or commission for his services.

2. Jobber: A jobber also known as Tarawaniwala is a member of the stock exchange who is specialised in one type of security and buys and sells securities on his own behalf.

3. Bulls: A bull is a speculator who buys securities expecting higher prices in future.

4. Bears: A bear is a speculator who sells securities expecting fall in prices in near future.

5. Stag: A stag is a speculator who applies for new securities in expectation that prices will rise by the time of allotment and he can sell them at premium.