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Financial Markets – Class 12 Business Studies notes, important questions and MCQs

NCERT Class 12 Business Studies, chapter 10. Notes, key terms, important questions with answers and MCQs.

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Chapter overview

A financial market brings together savers and borrowers and helps allocate savings to productive uses. It consists of the money market, for short-term funds, and the capital market, for long-term funds. The capital market has a primary market for new issues and a secondary market, the stock exchange, for trading existing securities. The Securities and Exchange Board of India (SEBI) regulates the securities market.

Money market

  • The money market deals in short-term funds with maturity up to one year; participants include the RBI, commercial banks, financial institutions and large companies.
  • Instruments: treasury bills (issued by the RBI on behalf of the government, for 91, 182 or 364 days), commercial paper (short-term unsecured promissory notes of companies), call money (very short-term inter-bank loans), certificates of deposit and commercial bills.

Capital market and stock exchange

  • The primary market (new issue market) raises fresh capital through offers through prospectus, offer for sale, private placement, rights issues and e-IPOs.
  • The secondary market (stock exchange) provides liquidity, price discovery, safety of transactions and contributes to economic growth.
  • The Bombay Stock Exchange (1875) is Asia's oldest; the National Stock Exchange (incorporated 1992) introduced screen-based trading nationwide.
  • Trading procedure: open a trading and demat account through a broker, place an order, the trade is executed, and settlement is done; India follows T+1 settlement.

SEBI

  • SEBI was set up in 1988 and given statutory powers by the SEBI Act, 1992.
  • Objectives: to protect investors, regulate stock exchanges and intermediaries, and promote fair dealing and development of the securities market.
  • Functions: regulatory (registering brokers, framing rules), developmental (investor education, training intermediaries) and protective (prohibiting insider trading and fraudulent practices).

Key terms

Financial market
a market for the creation and exchange of financial assets
Money market
the market for short-term funds with maturity up to one year
Capital market
the market for long-term funds through shares, debentures and loans
Treasury bill
a short-term government security issued at a discount by the RBI
Demat account
an account that holds securities in electronic form

Important questions with answers

Distinguish between the money market and the capital market.2 marks

The money market deals in short-term funds with maturity up to one year, using instruments such as treasury bills, commercial paper and call money; it has low risk and participants are mainly banks and financial institutions. The capital market deals in long-term funds through shares, debentures and long-term loans; it carries higher risk and expected returns, and individuals can participate.

State the functions of a stock exchange.3 marks

A stock exchange provides liquidity and marketability to existing securities; helps in price discovery through demand and supply; ensures safety of transactions through regulation; contributes to economic growth by channelising savings into investment; spreads the equity cult; and provides scope for speculation within limits.

Explain the objectives and functions of SEBI.5 marks

The Securities and Exchange Board of India was set up in 1988 and received statutory powers under the SEBI Act, 1992. Its objectives are to regulate stock exchanges and the securities industry to promote their orderly functioning, to protect the rights and interests of investors, to prevent trading malpractices and achieve a balance between self-regulation and statutory regulation, and to regulate and develop a code of conduct for intermediaries such as brokers and merchant bankers. Its functions are of three types. Regulatory functions include registering brokers, sub-brokers and other intermediaries, regulating mutual funds, regulating takeovers of companies, and conducting inquiries and audits of stock exchanges. Developmental functions include training intermediaries, promoting fair practices and a code of conduct, and conducting research and publishing information useful to market participants. Protective functions include prohibiting fraudulent and unfair trade practices such as price rigging, controlling insider trading and imposing penalties, and educating investors. Through these functions SEBI builds investor confidence and develops a fair and efficient securities market.

Quick revision

  • Money market: up to one year; T-bills, CP, call money, CD.
  • Capital market: primary and secondary.
  • Stock exchange functions: liquidity, price discovery, safety.
  • SEBI: protect investors, regulate, develop.

Exam tips

  • Make a table comparing the money market and capital market on period, instruments, participants and risk.
  • Remember the years: BSE 1875, SEBI 1988 (statutory 1992), NSE 1992.

Practice MCQs

  1. The market for short-term funds is the

    1. money market
    2. capital market
    3. primary market
    4. stock exchange
    Show answer

    Answer: (a) money market. Maturity is up to one year.

  2. SEBI was given statutory powers in

    1. 1875
    2. 1988
    3. 1992
    4. 2008
    Show answer

    Answer: (c) 1992. By the SEBI Act, 1992.

  3. The market where new securities are issued is the

    1. secondary market
    2. primary market
    3. money market
    4. commodity market
    Show answer

    Answer: (b) primary market. It is also called the new issue market.

  4. Treasury bills are issued by the RBI on behalf of the

    1. companies
    2. SEBI
    3. commercial banks
    4. government
    Show answer

    Answer: (d) government. They are short-term government securities.

  5. The oldest stock exchange in Asia is the

    1. Bombay Stock Exchange
    2. National Stock Exchange
    3. Calcutta Stock Exchange
    4. Delhi Stock Exchange
    Show answer

    Answer: (a) Bombay Stock Exchange. It was set up in 1875.

  6. Securities held in electronic form are kept in a

    1. savings account
    2. current account
    3. demat account
    4. fixed deposit
    Show answer

    Answer: (c) demat account. Depositories maintain them.

  7. Very short-term borrowing between banks, often for a day, is

    1. call money
    2. commercial paper
    3. treasury bill
    4. debenture
    Show answer

    Answer: (a) call money. It helps banks meet reserve needs.

  8. Which is a protective function of SEBI

    1. registering brokers
    2. conducting research
    3. training intermediaries
    4. prohibiting insider trading and fraudulent practices
    Show answer

    Answer: (d) prohibiting insider trading and fraudulent practices. It safeguards investors.

All chapters of Class 12 Business Studies

Written by Kundali IQ from standard, well-established facts to help with revision. This is not an official NCERT publication; always read your textbook too.