Test: Financial Markets - 2 - Commerce MCQ

SEBI (Securities Exchange Board of India) Establishment:
Background:
SEBI is the regulatory body for the securities market in India. It was established to protect the interests of investors and promote the development of the securities market.
Establishment Year:
SEBI was established in 1988 and was given statutory powers on April 12, 1992, through the enactment of the SEBI Act, 1992.
Functions of SEBI:
SEBI is responsible for regulating and supervising the securities market in India. Its main functions include:
1. Regulation and Oversight: SEBI regulates and oversees various participants in the securities market, including stock exchanges, brokers, portfolio managers, and depository participants.
2. Investor Protection: SEBI's primary focus is to protect the interests of investors. It ensures fair and transparent dealings in the securities market and takes actions against fraudulent practices.
3. Market Development: SEBI promotes the development of the securities market by introducing new regulations, facilitating the listing of companies, and encouraging innovation and competition.
4. Enforcement of Regulations: SEBI has the power to enforce its regulations and take actions against violations. It conducts investigations, imposes penalties, and initiates legal proceedings when necessary.
5. Education and Awareness: SEBI plays a crucial role in educating and creating awareness among investors. It conducts investor education programs, disseminates information, and provides guidance on investment-related matters.
Conclusion:
SEBI was established in 1988 and was given statutory powers in 1992. It plays a vital role in regulating and supervising the securities market in India, ensuring investor protection, and promoting market development.

The correct answer is A: SEBI.
Explanation:
The money market is a segment of the financial market where short-term borrowing and lending of funds take place. Various participants operate in the money market, but SEBI (Securities and Exchange Board of India) is not one of them. Here's a breakdown of the participants in the money market:
A. SEBI:
- SEBI is the regulatory body for the securities market in India.
- It regulates and oversees activities such as stock exchanges, brokers, and other intermediaries in the capital market.
- SEBI's primary focus is on the equity market and does not directly participate in the money market.
B. NBFCs:
- NBFCs (Non-Banking Financial Companies) are financial institutions that provide banking services without meeting the legal definition of a bank.
- They participate in the money market by borrowing and lending funds for short-term periods.
C. RBI:
- RBI (Reserve Bank of India) is the central bank of India.
- It is responsible for the formulation and implementation of monetary policy in the country.
- RBI actively participates in the money market by conducting open market operations, issuing treasury bills, and regulating the overall liquidity in the market.
D. Mutual Funds:
- Mutual funds pool money from various investors and invest in a diversified portfolio of securities.
- They participate in the money market by investing in short-term money market instruments such as treasury bills, commercial papers, and certificates of deposit.
In conclusion, SEBI is not a participant in the money market. The other options, NBFCs, RBI, and Mutual Funds, actively participate in the money market by borrowing, lending, regulating, and investing in various money market instruments.

Capital market deals in medium and long term securities. Here is a detailed explanation:
Definition of Capital Market:
The capital market is a financial market that deals with buying and selling of long-term securities, such as stocks, bonds, and other financial instruments. It is a platform where individuals and institutions trade financial securities.
Characteristics of Capital Market:
1. Long-term securities: The capital market primarily deals with medium and long-term securities, which have a maturity period of more than one year. These include stocks, bonds, debentures, and mutual funds.
2. Investment opportunities: The capital market provides investors with various investment opportunities to channel their savings into productive investments. It allows individuals and institutions to participate in the growth of companies and the economy.
3. Capital formation: The capital market plays a crucial role in capital formation by providing a platform for companies to raise capital for their expansion and growth. It facilitates the transfer of funds from savers to borrowers.
4. Liquidity: Although capital market securities have a long-term maturity, they are often traded in a secondary market, providing investors with liquidity. Investors can buy and sell these securities before their maturity, enabling them to access their investment when needed.
5. Risk and return: Capital market investments carry a certain level of risk. Investors need to assess the risk-return tradeoff before investing. Higher returns are generally associated with higher risks.
6. Regulation: Capital markets are regulated by government authorities and regulatory bodies to ensure fair and transparent transactions. These regulations protect investors' interests and maintain market integrity.
Conclusion:
In conclusion, capital markets deal in medium and long-term securities, providing individuals and institutions with investment opportunities and facilitating capital formation. It is an essential component of the financial system, enabling companies to raise capital and investors to participate in the growth of the economy.

Answer:
Capital Market:
- Capital market refers to a market where individuals and institutions trade financial securities such as stocks, bonds, and other long-term investments.
- It facilitates the flow of funds between investors (savers) and borrowers (companies, governments) for long-term investment purposes.
- The capital market consists of various entities that play different roles in the market.
Entities in Capital Market:
A. Banks:
- Banks are financial institutions that provide various financial services such as accepting deposits, providing loans, and facilitating payment services.
- While banks are an important part of the overall financial system, they are not considered a part of the capital market. They primarily operate in the money market.
B. Financial Institutions:
- Financial institutions include insurance companies, pension funds, mutual funds, and other non-banking financial companies.
- These institutions play a significant role in the capital market by mobilizing savings from individuals and investing them in various capital market instruments.
C. Stock Exchanges:
- Stock exchanges are marketplaces where buyers and sellers trade stocks and other securities.
- They provide a platform for companies to raise capital by issuing shares to the public and for investors to buy and sell these shares.
D. RBI (Reserve Bank of India):
- The RBI is the central bank of India and regulates the country's monetary and financial system.
- While the RBI plays a crucial role in the overall financial system, it is not directly involved in the capital market.
Conclusion:
The entity that is not a part of the capital market is D: RBI (Reserve Bank of India). While it is an integral part of the financial system, it does not directly participate in the capital market activities such as trading of securities or providing a platform for capital market transactions.

Capital Market is the market which is concerned with raising capital for business through various instruments. Shares, Debentures, bonds etc. are types of instruments which are traded in the capital market. Equity share and preference share are two types of shares.

The instruments traded in a Money Market are:
1. Treasury bills: These are short-term securities issued by the government to raise funds for short-term expenses. They have a maturity period of less than one year and are considered one of the safest investments in the money market.
2. Commercial bills: Also known as commercial papers, these are unsecured promissory notes issued by corporations to finance their short-term cash needs. They have a maturity period of less than one year and are typically bought by institutional investors.
3. Call money: This refers to short-term funds borrowed or lent in the money market for a period of one day. Call money transactions are typically made between banks and financial institutions to manage their short-term liquidity needs.
Therefore, the correct answer is D: All of these.

Money Market is the part of financial market where instruments with high liquidity and very short-term maturities are traded. It's the place where large financial institutions, dealers and government participate and meet out their short-term cash needs. They usually borrow and lend money with the help of instruments or securities to generate liquidity. Due to highly liquid nature of securities and their short-term maturities, money market is treated as safe place.

Money markets are unorganized markets where banks, financial institutions, money dealers and brokers trade in financial instruments for a short period of time. They trade in short-term debt instruments like trade credit, commercial paper, etc. Since the money market is liquid and the maturity time is less than one year and the risk involved is low hence, money markets give a low return on investments.

A Treasury Bill is a short-term debt obligation with a maturity of one year or less.

Treasury bill means one type of instrument which is issued by RBI for short term period for increase cash liquidity. treasury bill is also known as zero coupon bond because no interest paid on it. Treasury bill is also known as T-bill.

Primary and secondary markets complement each other. Primary market deals with the issue of new securities. On the other hand, secondary market deals in the purchase and sale of the existing securities. That is, once the securities are issued in primary market, they are then traded in the secondary market.

Commercial bill is a short term, negotiable, and self-liquidating instrument with low risk. It creates a liability to make payment in a fixed date when goods are bought on credit.
Bills of exchange are negotiable instruments drawn by the seller (drawer) on the buyer (drawee) on the value of the goods delivered to him.
Such bills are called trade bills. When trade bills are accepted by commercial banks, they are called commercial bills.

"Capital Markets" refers to activities that gather funds from some entities and make them available to other entities needing funds. The core function of such a market is to improve the efficiency of transactions so that each individual entity doesn't need to do search and analysis, create legal agreements, and complete funds transfer.

Money market deals in short term securities

Money market refers to the market where short-term borrowing and lending of funds takes place. It deals with various short-term financial instruments that have a maturity period of one year or less. These instruments are highly liquid and have low risk.

Key points about money market:

• Money market deals in short-term securities, which include:




• Treasury bills: Short-term debt obligations issued by the government


• Commercial paper: Unsecured promissory notes issued by corporations to raise short-term funds


• Certificates of deposit: Time deposits issued by banks with a fixed maturity date


• Repurchase agreements: Short-term loans collateralized by government securities


• Banker's acceptances: Time drafts drawn on and accepted by banks, used to finance international trade


• Short-term municipal notes: Short-term debt securities issued by municipalities




• Money market instruments provide short-term funding options for governments, financial institutions, and corporations.


• Investors in money market instruments usually seek safety of principal and stability of returns.


• Money market transactions are typically conducted in large denominations and by institutional investors.


• Money market instruments are traded in the secondary market, allowing investors to buy and sell them before maturity.


• Money market investments are considered relatively low-risk compared to other types of investments.


• Money market deals play a crucial role in the overall functioning of the financial system by providing liquidity and facilitating short-term borrowing and lending.

Therefore, the correct answer is option C: Short-term securities.

Only institutional investors can participate in money market. The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods, typically up to twelve months.

Flotation is the process of converting a private company into a public company by issuing shares available for the public to purchase. Flotation, also known as "going public,"
Following are the methods of doing so:
1. Private placement is a way of raising capital by allotting securities to institutional investors and some selected individuals. It helps to raise capital more quickly than a public issue.
2. A prospectus is a formal document that provides details about an investment offering to the public.
3. In Offer for sale securities are done through intermediaries and are not issued directly to the public.

Meaning of Right Issue:
A right issue is a way for a company to raise additional capital by offering new shares to its existing shareholders. This allows the shareholders to purchase new shares in proportion to their existing holdings at a discounted price.
Key Points:
- Right issue is a method used by companies to raise funds from existing shareholders.
- It involves offering new shares to the current shareholders.
- The shareholders have the right to purchase the new shares in proportion to their existing holdings.
- The shares are usually offered at a discounted price compared to the market price.
- The purpose of a right issue is to provide existing shareholders with the opportunity to maintain their ownership percentage in the company and to raise additional capital for the company's growth and expansion plans.
- The proceeds from the right issue can be used for various purposes such as debt repayment, funding acquisitions, research and development, or general working capital needs.
- The shareholders who do not wish to participate in the right issue can sell their rights to other investors in the market.
- The right issue is regulated by securities laws and regulations to ensure transparency and fairness in the process.
Conclusion:
In conclusion, a right issue is a method used by companies to raise capital by offering new shares to its existing shareholders. It provides an opportunity for shareholders to purchase new shares at a discounted price and helps the company raise funds for its growth and expansion plans.

Private placement includes sale of stock shares or bonds to pre selected investors. These pre selected investors include wealthy individual investors, banks and other financial institutions, mutual funds, insurance companies, and pension funds.

Demat Account:
A Demat Account, short for Dematerialized Account, is an electronic account that holds an individual's shares and securities in a dematerialized or electronic format. It is similar to a bank account, but instead of holding money, it holds financial instruments like shares, bonds, debentures, etc. Here's a detailed explanation of what a Demat Account entails:
1. Dematerialisation of Securities:
- Demat Account facilitates the process of dematerialization, which means converting physical share certificates into electronic form.
- It allows investors to hold their securities in a digital format, eliminating the need for physical certificates.
- Dematerialization ensures safe, secure, and convenient storage of securities.
2. Depository Participant Account:
- A Demat Account is opened with a Depository Participant (DP), who acts as an intermediary between the investor and the depository.
- The DP maintains the investor's account and facilitates the buying, selling, and transferring of securities.
3. Features and Benefits:
- Easy and convenient way to hold and manage securities.
- Eliminates the risk of loss, theft, or damage of physical certificates.
- Quick and seamless transfer of securities.
- Enables electronic settlement of trades in the stock market.
- Access to various investment options like equity shares, mutual funds, bonds, government securities, etc.
4. Opening a Demat Account:
- To open a Demat Account, an investor needs to approach a DP and complete the account opening process.
- The investor needs to submit the required documents, such as identity proof, address proof, PAN card, and a filled-in account opening form.
- Once the account is opened, the DP provides the investor with a unique Demat Account number.
5. Charges and Maintenance:
- There are certain charges associated with Demat Account, such as account opening charges, annual maintenance charges, transaction charges, etc.
- The maintenance of the account includes regular updates of holdings, transactions, and account statements.
Overall, a Demat Account plays a crucial role in the modern financial system by providing a secure and efficient way to hold and manage securities. It simplifies the process of trading and investing in the stock market, making it accessible to a wide range of investors.

A depository is an entity which helps an investor to buy or sell securities such as stocks and bonds in a paper-less manner. Securities in depository accounts are similar to funds in bank accounts. The Depository Act of 1996 paved the way for the establishment of the two depositories in India, namely National Securities Depository Limited (NSDL) and other depository is the Central Depository Services Limited (CDSL).