Important Questions : Finanancial Markets - Class 12 PDF Download

 Page 1


 
CHAPTER 10 
FINANCIAL MARKETS 
8Marks 
CONCEPT MAPPING: 
 
 
Page 2


 
CHAPTER 10 
FINANCIAL MARKETS 
8Marks 
CONCEPT MAPPING: 
 
 
 
 
 
 
 
 
Key Concepts in nutshell: 
 
    CONCEPT OF FINANCIAL MARKET: 
It refers to the market which creates and exchanges financial assets. 
 
FUNCTIONS OF FINANICIAL MARKET 
1. Mobilization of savings and channeling them into the most productive uses: A 
financial market facilitates the transfer of savings from savers to investors (industries) 
2.Facilitates price discovery: In the financial market, the households are suppliers of funds 
and business firms represent the demand.  The interaction between them helps to establish a 
price for the financial asset which is being traded in that particular market. 
3. Provide liquidity to financial assets: Financial markets facilitate easy purchase and sale 
of financial assets.  In doing so they provide liquidity to financial assets,  so that they can be 
easily converted into cash whenever required. 
4. Reduce the cost of transactions:  Financial markets provide valuable information about 
securities being traded in the market.  It helps to save time, effort and money. 
 
 
 
 
 
Page 3


 
CHAPTER 10 
FINANCIAL MARKETS 
8Marks 
CONCEPT MAPPING: 
 
 
 
 
 
 
 
 
Key Concepts in nutshell: 
 
    CONCEPT OF FINANCIAL MARKET: 
It refers to the market which creates and exchanges financial assets. 
 
FUNCTIONS OF FINANICIAL MARKET 
1. Mobilization of savings and channeling them into the most productive uses: A 
financial market facilitates the transfer of savings from savers to investors (industries) 
2.Facilitates price discovery: In the financial market, the households are suppliers of funds 
and business firms represent the demand.  The interaction between them helps to establish a 
price for the financial asset which is being traded in that particular market. 
3. Provide liquidity to financial assets: Financial markets facilitate easy purchase and sale 
of financial assets.  In doing so they provide liquidity to financial assets,  so that they can be 
easily converted into cash whenever required. 
4. Reduce the cost of transactions:  Financial markets provide valuable information about 
securities being traded in the market.  It helps to save time, effort and money. 
 
 
 
 
 
 
 
 
 
Instruments: 
1. Treasury Bill (T-bills):  It is basically an instrument of short-term borrowing by the 
Government of India maturing in less than one year.  They are also known as Zero Coupon 
Bonds. 
2. Commercial Paper:  It is a short-term unsecured promissory note, negotiable and 
transferable by endorsement and delivery with a fixed maturity period.  It is issued by large 
Page 4


 
CHAPTER 10 
FINANCIAL MARKETS 
8Marks 
CONCEPT MAPPING: 
 
 
 
 
 
 
 
 
Key Concepts in nutshell: 
 
    CONCEPT OF FINANCIAL MARKET: 
It refers to the market which creates and exchanges financial assets. 
 
FUNCTIONS OF FINANICIAL MARKET 
1. Mobilization of savings and channeling them into the most productive uses: A 
financial market facilitates the transfer of savings from savers to investors (industries) 
2.Facilitates price discovery: In the financial market, the households are suppliers of funds 
and business firms represent the demand.  The interaction between them helps to establish a 
price for the financial asset which is being traded in that particular market. 
3. Provide liquidity to financial assets: Financial markets facilitate easy purchase and sale 
of financial assets.  In doing so they provide liquidity to financial assets,  so that they can be 
easily converted into cash whenever required. 
4. Reduce the cost of transactions:  Financial markets provide valuable information about 
securities being traded in the market.  It helps to save time, effort and money. 
 
 
 
 
 
 
 
 
 
Instruments: 
1. Treasury Bill (T-bills):  It is basically an instrument of short-term borrowing by the 
Government of India maturing in less than one year.  They are also known as Zero Coupon 
Bonds. 
2. Commercial Paper:  It is a short-term unsecured promissory note, negotiable and 
transferable by endorsement and delivery with a fixed maturity period.  It is issued by large 
 
and creditworthy companies to raise sort-term funds at lower rates of interest than market 
rates.  It usually has a maturity period of 15 days to one year. 
3. Call Money:  It is a short-term finance repayable on demand, with a maturity period of one 
day to fifteen days, used for inter-bank transactions.  It is a method by which banks borrow 
from each other to be able to maintain the cash reserve ratio. 
4. Certificate of Deposit (CD): It is a unsecured, negotiable short-term instruments in bearer 
form, issued by commercial banks and development financial institutions.  It can be issued to 
individuals, corporations and companies. 
5. Commercial Bill (Trade Bill): It is a short-term , negotiable, self-liquidating instrument 
which is used to finance the credit sales of firms.  The bill can be discounted with a bank if the 
seller (drawer) needs funds before the bill maturity.  
 
 
 
 
TYPES OF CAPITAL MARKET: 
Primary Market: It is also known as the new issues market.  It deals with new securities 
being issued for the first time.  A company can raise capital through the primary market in the 
form of equity shares, preference shares, debentures, loans and deposits. 
Secondary Market: It is also known as stock market or stock exchange or second-hand 
market.  It is a market for the purchase and sale of existing securities. 
 
Difference between Primary Market and Secondary Market 
 
Page 5


 
CHAPTER 10 
FINANCIAL MARKETS 
8Marks 
CONCEPT MAPPING: 
 
 
 
 
 
 
 
 
Key Concepts in nutshell: 
 
    CONCEPT OF FINANCIAL MARKET: 
It refers to the market which creates and exchanges financial assets. 
 
FUNCTIONS OF FINANICIAL MARKET 
1. Mobilization of savings and channeling them into the most productive uses: A 
financial market facilitates the transfer of savings from savers to investors (industries) 
2.Facilitates price discovery: In the financial market, the households are suppliers of funds 
and business firms represent the demand.  The interaction between them helps to establish a 
price for the financial asset which is being traded in that particular market. 
3. Provide liquidity to financial assets: Financial markets facilitate easy purchase and sale 
of financial assets.  In doing so they provide liquidity to financial assets,  so that they can be 
easily converted into cash whenever required. 
4. Reduce the cost of transactions:  Financial markets provide valuable information about 
securities being traded in the market.  It helps to save time, effort and money. 
 
 
 
 
 
 
 
 
 
Instruments: 
1. Treasury Bill (T-bills):  It is basically an instrument of short-term borrowing by the 
Government of India maturing in less than one year.  They are also known as Zero Coupon 
Bonds. 
2. Commercial Paper:  It is a short-term unsecured promissory note, negotiable and 
transferable by endorsement and delivery with a fixed maturity period.  It is issued by large 
 
and creditworthy companies to raise sort-term funds at lower rates of interest than market 
rates.  It usually has a maturity period of 15 days to one year. 
3. Call Money:  It is a short-term finance repayable on demand, with a maturity period of one 
day to fifteen days, used for inter-bank transactions.  It is a method by which banks borrow 
from each other to be able to maintain the cash reserve ratio. 
4. Certificate of Deposit (CD): It is a unsecured, negotiable short-term instruments in bearer 
form, issued by commercial banks and development financial institutions.  It can be issued to 
individuals, corporations and companies. 
5. Commercial Bill (Trade Bill): It is a short-term , negotiable, self-liquidating instrument 
which is used to finance the credit sales of firms.  The bill can be discounted with a bank if the 
seller (drawer) needs funds before the bill maturity.  
 
 
 
 
TYPES OF CAPITAL MARKET: 
Primary Market: It is also known as the new issues market.  It deals with new securities 
being issued for the first time.  A company can raise capital through the primary market in the 
form of equity shares, preference shares, debentures, loans and deposits. 
Secondary Market: It is also known as stock market or stock exchange or second-hand 
market.  It is a market for the purchase and sale of existing securities. 
 
Difference between Primary Market and Secondary Market 
 
 
Primary Market  Secondary Market  
1. It is the market for new 
securities.  
2. Securities are exchanged 
between company and the 
investors.  
3.  It promotes capital formation 
directly.  
4.  Only buying of securities takes 
place.  Securities cannot be sold 
here.  
5.  There is no fixed geographical 
location.  
6.  Prices are determined and 
decided by the management of 
the company.  
7. Securities are issued to 
investors for the first time.  
1. It is the market for existing 
securities.  
2.  Securities are exchanged between 
investors. 
 
3. It promotes capital formation 
indirectly.  
4. Both buying and selling of 
securities can take place in the stock 
exchange / stock market.  
5. There is a specified location. 
 
6. Prices are determined by demand 
and supply for the security in the 
stock exchange. 
7. Securities may be bought and sold 
many times but not the first time.  
 
Methods of Floatation: 
Following are the methods of raising capital from the primary market : 
• 1. Public issue through prospectus: under this method the company wanting to raise 
capital issues a prospectus to inform and attract the investing public.  It invites 
prospective investors to apply for the securities.  
• 2.Offer for sale: under this method the sale of securities takes place in two steps.  In 
the first step the company sells the entire lot of shares to the intermediary firms of 
stock brokers at an agreed price .In the second step, the intermediary resells these 
shares to investors at a higher price. 
• 3. Private placement: In private placement the entire lot of new securities is 
purchased by an intermediary at a fixed price and sold not to the public but to selected 
clients at a higher price. 
• 4 .Rights issue (for existing companies: This is the offer of new shares (additional 
shares) by an existing company to the existing shareholders.  The shareholder may 
either accept the offer for himself or assign to another.  A rights issue to the existing 
shareholders is a mandatory requirement. 
• 5. e-IPOs: A company proposing to issue capital to the public through the on-line 
system of the stock exchange has to enter into an agreement with the stock exchange.  
This is called an Initial Public Offer (IPO).  The issuer company should also appoint a 
registrar to the issue having electronic connectivity with the exchange.