UNIT 10– Financial Markets
Business Finance and Marketing
Unit 10: Financial Markets
CONTENTS TO BE COVERED:
• Money market instruments
• Types of Capital market:(Primary and secondary)
• Distinction between capital market and money market
• Stock exchange-Functions and Trading procedure
• Functions of SEBI
CUET-BST-EXAM PATTERN
Particulars Details
Exam Mode Online
Exam Frequency Once a Year
Section Section 2
Question Type MCQ
No. of Question 50
No. of Attempts 40
+5 for each correct answer -1 for each
incorrect answer
Marking Scheme
No marks will be deducted for Unattempted
questions
Total Marks 200
Duration for Business Studies
45 Minutes
paper
Questions which came from
Unit-10
in CUET-ACTUAL PAPER-2023
Question1:
Identify the market that is known as Stock Exchange
A. Secondary Market
B. Money Market
C. Capital Market
D. Primary Market
Answer1:
Option A.
Stock market is known as secondary market for buying equities, and
includes New York Stock Exchange, Nasdaq and all major stock
exchanges around the world.
Question 2:
Match List I with List II
Choose the correct answer from the options given below
A. A-I, B-II, C-IV, D-III
B. A-I, B-II, C-III, D-IV
C. A-III, B-II, C-IV, D-I
D. A-III, B-I, C-II, D-IV
Answer 2:
Option B
A-I, B-II, C-III, D-IV is the correct match.
Money market
• Market for short term funds
• Deals in monetary assets with maturity period up to one year.
• It is a market where low risk.
• Unsecured and short term debt instruments that are highly liquid are
traded everyday.
• It has no physical location.
• Participants: Reserve Bank of India (RBI), Commercial Banks, Non-
Banking Finance Companies, State Governments, Large Corporate
Houses and Mutual Funds.
Money market Instruments:
1. Treasury Bill:
• Instrument of short-term borrowing.
• Also known as Zero Coupon Bonds.
• Issued in the form of a promissory note.
• Highly liquid and have assured yield and negligible risk of default.
• Issued at a price which is lower than their face value and repaid at par.
• Difference is known as interest receivable on them and is called
discount.
• Available for a minimum amount of Rs 25,000 and in multiples thereof.
Example:
Suppose an investor purchases a 91 days Treasury bill with a face
value of Rs. 1,00,000 for Rs. 96,000. By holding the bill until the
maturity date, the investor receives Rs. 1,00,000. The difference of
Rs. 4,000 between the proceeds received at maturity and the amount
paid to purchase the bill represents the interest received by him.
2. Commercial Paper:
• 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 short-term
funds at lower rates of interest than market rates.
• Maturity period-15 days to one year.
• Sold at a discount and redeemed at par.
• For example, companies use this instrument for purposes such as
bridge financing. Suppose a company needs long-term finance to
buy some machinery. In order to raise the long term funds in the
capital market the company will have to incur floatation costs.
Funds raised through commercial paper are used to meet the
floatation costs. This is known as Bridge Financing.
3. Call Money:
• Short term finance repayable on demand.
• Maturity period of one day to fifteen days.
• Commercial banks have to maintain a minimum cash balance
known as cash reserve ratio.
• CRR affects the amount of funds available to be given as loans by
commercial banks.
• The interest rate paid on call money loans is known as the call rate
which is highly volatile.
4. Certificate of Deposit:
• Unsecured, negotiable, short-term instruments in bearer form.
• Issued by commercial banks and development financial institutions.
• Can be issued to individuals, corporations and companies during
periods of tight liquidity when the deposit growth of banks is slow
but the demand for credit is high.
5. Commercial Bill:
• Used to finance the working capital requirements of business firms.
• Short-term, negotiable, self-liquidating instrument used to finance the
credit sales of firms.
• Seller (drawer) of the goods draws the bill and the buyer (drawee)
accepts it.
• When accepted, it becomes a marketable instrument and is called a
trade bill.
• When a trade bill is accepted by a commercial bank it is known as a
commercial bill.
Types of capital market
The capital market is divided into two parts:
1. Primary Market-
• Also know as New Issue Market.
• It supports both private and public offerings.
• Involves Initial Public Offer (IPO) or Further Public Offer (FPO).
• IPO – Public offer made for the first time.
• This trade is between the investors and the original issuer in the
primary market.
2. Secondary Market –
Securities are old and have already been issued in the primary market
for trade.
The trade is between the buyer and seller and the stock exchange
facility.
Distinction between capital market and money market
Stock exchange-Functions
• A stock exchange is an institution which provides a platform for
buying and selling of existing securities.
• The following are some of the important functions of a stock
exchange:
1. Providing Liquidity and Marketability to Existing Securities:
The basic function of a stock exchange is the creation of a continuous
market where securities are bought and sold. It gives investors the
chance to disinvest and reinvest.
2. Pricing of Securities: Share prices on a stock exchange are
determined by the forces of demand and supply.
3. Safety of Transaction: The membership of a stock exchange is
well defined according to the existing legal framework. This ensures
that the investing public gets a safe and fair deal on the market.
4. Contributes to Economic Growth: A stock exchange is a
market in which existing securities are resold or traded. Through
disinvestment and reinvestment savings get channelized into their
most productive investment avenues.
5. Spreading of Equity Cult: The stock exchange can play a vital
role in ensuring wider share ownership by regulating new issues,
better trading practices and taking effective steps in educating the
public about investments.
6. Providing Scope for Speculation: The stock exchange provides
sufficient scope within the provisions of law for speculative activity in
a restricted and controlled manner.
It is necessary to ensure liquidity and price continuity in the stock
market.
Stock exchange-Trading and settlement
procedure
1. Selecting a Broker or Sub-broker-
• Person cannot trade in the stock market, in his/her individual
capacity.
• Broker must be appointed.
• Broker can be an individual or a partnership or a company or
a financial institution (like banks). They must be registered under
SEBI.
• 2. Opening a Demat Account-
• All securities are now in electronic format.
• No issues of physical shares/securities anymore.
• Demat account is to be opened with the depository participant.
• Currently, in India, there are two depository participants, namely
Central Depository Services Ltd. (CDSL) and National Depository
Services Ltd. (NDSL).
3. Placing Orders-
• Investor will place an order to buy or sell shares.
• The order will be placed with his broker.
• Order /instructions should be very clear.
• Example: Buy 100 shares of XYZ Co. for a price of Rs. 140/- or
less.
• Broker will place an order for the shares at the price mentioned or
even a better price if available.
• Then issues an order confirmation slip to the investor.
4. Execution of the Order-
• Broker receives the order then executes it.
• Within 24 hours the broker must issue a Contract Note.
• It contains information about the transactions, like the number of
shares transacted, the price, date and time of the transaction,
brokerage amount, etc.
• Contract Note is evidence of the transaction in case of legal
dispute. It contains Unique Order Code assigned by the stock
exchange.
• 5. Settlement-
• Actual securities are transferred from the buyer to the seller.
• Funds will also be transferred.
• Broker will deal with the transfer.
• There are two types of settlements:
• On the Spot settlement: Here we exchange the funds
immediately and the settlement follows the T+2 pattern. So a
transaction occurring on Monday will be settled by Wednesday (by
the second working day)
• Forward Settlement: Simply means both parties have decided the
settlement will take place on some future date. It can be T+% or
T+9 etc.
SEBI
• Established by the Government of India on 12 April 1988 as
an interim administrative body to promote orderly and healthy
growth of securities market and for investor protection.
• The SEBI was given a statutory status on 30 January 1992
through an ordinance.
• The ordinance was later replaced by an Act of Parliament known as
the Securities and Exchange Board of India Act, 1992.
Functions of SEBI
• Regulatory Functions
1. Registration of brokers, sub-brokers and other players.
2. Registration of collective investment schemes and Mutual Funds.
3. Regulation of stock brokers, portfolio exchanges etc.
4. Regulation of takeover bids by companies.
5. Audit of stock exchanges and intermediaries.
6. Levying fee for carrying out the purposes of the Act.
7. Exercising such power under Securities Contracts (Regulation) Act
1956.
Development Functions
1. Training of intermediaries of the securities market.
2. Conducting research.
3. Publishing useful information for all participants.
4. Undertaking measures to develop the capital markets.
Protective Functions
1. Prohibition of fraudulent and unfair trade practices like making
misleading statements, manipulations, price rigging etc.
2. Controlling insider trading and imposing penalties for such
practices.
PRACTICE QUESTIONS
