NCERT Solutions For Class 12 Commerce Business Studies Chapter 2 - Financial Markets

4/13/23, 9:29 AM NCERT Solutions for Class 12 Commerce Business studies Chapter 2 - Financial Markets
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Business studies Chapter 2 - Financial
Markets
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NCERT Solutions  Class 12  Business Studies  Financial Markets
NCERT Solutions for Class 12 Commerce Business studies Chapter 2 Financial Markets
are provided here with simple step-by-step explanations. These solutions for Financial
Markets are extremely popular among Class 12 Commerce students for Business studies
Financial Markets Solutions come handy for quickly completing your homework and
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Page No 289:
Question 1:
Primary and secondary markets

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(a) Compete with each other Share
(b) Complement each other
(c) Function independently
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(d) Control each other
ANSWER:
Primary and secondary markets complement each other. Primary market deals with the issue
of new securities. That is, through the primary market a company raises capital directly from
the borrowers. 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. It is in this sense that both the markets complement each
other.
Page No 290:
Question 2:
The total number of Stock Exchange in India is
(a) 20
(b) 21
(c) 22
(d) 23
ANSWER:
The total number of Stock Exchange in India is 23. However, as per the latest updates by
SEBI, there are 25 Stock Exchanges in India.
Page No 290:
Question 3:
The settlement cycle in NSE is
(a) T+5
(b) T+3
(c) T+2
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Share
(d) T+1
ANSWER:
Settlement cycle refers to the time period within which the actual settlement between the
buyers and sellers of shares takes place. In other words, it refers to the time period within
which the seller of the shares would receive the money and the buyers of the share would get
the ownership of the share. NSE follows a T+2 settlement cycle. Here, T refers to the
transaction date. Thus, T+2 implies that transactions in NSE are settled within 2 days of the
transaction date.
Page No 290:
Question 4:
The National Stock Exchange of India was recognized as stock exchange in the year
(a) 1992
(b) 1993
(c) 1994
(d) 1995
ANSWER:
National Stock Exchange of India was promoted by financial institutions and established as a
public limited company in 1992. However, it was 'recognized as a stock exchange' in
April,'1993' under Securities Contracts (Regulation) Act,1956. It commenced its operations in
capital market in 1994 and operations in derivatives market were started in 2000.
Page No 290:
Question 5:
NSE commenced futures trading in the year
(a) 1999
(b) 2000
(c) 2001
(d) 2002
ANSWER:
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Share
National Stock Exchange started its operations in the year 1994. It commenced 'trading in
future' and options market on 12 June, '2000'.
Page No 290:
Question 6:
Clearing and settlement operations of NSE are carried out by
(a) NSDL
(b) NSCCL
(c) SBI
(d) CDSL
ANSWER:
The clearing and settlement operations of NSE are carried out by NSCCL. NSCCL (National
Securities Clearing Corporation Ltd.) was incorporated in august, 1995 and it commenced its
clearing operations for NSE in April 1996.
Page No 290:
Question 7:
A Treasury Bill is basically
(a) An instrument to borrow short-term funds
(b) An instrument to borrow long-term funds
(c) An instrument of capital market
(d) None of the above
ANSWER:
A Treasury Bill is an instrument to borrow short term funds by the Government of India. They
have a maturity period of less than a year. They are also called Zero-Coupon Bonds. They
are issued by the RBI on behalf of the Central Government.
Page No 290:
Question 1: 
Share
What are the functions of a financial market?
ANSWER:
A financial market refers to the market where the creation and exchange of financial assets
such as shares and debentures takes place. The following are the functions of a financial
market.
i) Transfer of Savings and Alternatives for Investment
A financial market acts a link between the savers and the investors. It provides a platform for
the transfer of savings from the households to the investors. It also provides savers with
various alternatives for investment and thereby, directs the funds to the most productive
investment.
ii) Establishes the Price
Similar to a commodity, the price of a financial asset is established through the forces of
demand and supply for funds. Financial market provides a platform for the interaction of the
demand of the funds (represented by the business firms) and the supply of funds
(represented by the households). Thereby, it helps in determining the price of the asset being
traded.
iii) Facilitates Liquidity
An asset or a security can be easily purchased and sold in a financial market. This renders
liquidity to the assets. That is, through trading in the financial market assets can be easily
converted into cash or cash equivalents.
iv) Reduced Cost of Transaction
By rendering information regarding the securities being traded, their price, availability, etc., a
financial market helps in reducing the cost of transaction in terms of effort, money and time.
Page No 290:
Question 2:
''Money Market is essentially a Market for short term funds''. Discuss.
ANSWER:
Money market refers to the market for trading of short term securities and funds. Securities
traded in the money market have a very short maturity period ranging from one day to one
year. Such assets act as a close substitute for cash or money. Due to their short maturity
period they are also known as 'Near Money instruments'. Money market instruments act as
an important source of finance for working capital requirements. They enjoy a high degree of
liquidity. DFHI discounts money market securities and offers a ready market for them. In
addition, securities traded in the money market are safe and secure as the transactions are
made in those instruments that are issued by financial institutions and those companies that

are financially strong. Common instruments traded in the money market are treasury bills, Share
commercial paper, call money, certificate of deposit, etc.
Page No 290:
Question 3:
What is a Treasury Bill?
ANSWER:
Treasury Bill is a short term promissory note issued by the Reserve Bank of India on behalf of
the Central Government of India. They are issued to fulfil the short-term fund requirements of
the Government of India. Maturity period of Treasury Bills ranges from 14 days to 364 days.
Generally, these bills are brought by commercial banks, LIC, UTI, non-baking financial
companies, etc. They are also called Zero-Coupon Bonds. Treasury bills are highly liquid
instruments because of the fact that the RBI is always ready to purchase these bills.
Moreover, they are also considered to be the safest instrument as they are issued by the RBI.
They are available for a minimum amount of Rs 25,000 and in multiples thereof. Treasury
Bills are issued at a discount i.e. they are issued at a price which is lower than the face value
and are redeemed at par. Herein, the discount (the difference between the price of issue and
the redemption value) is the interest received at the time of redemption.
Page No 290:
Question 4:
Distinguish between Capital Market and Money Market.
ANSWER:
The following points highlight the difference between Capital Market and Money Market.
Basis of Difference Capital Market Mo
Time Span of Securities Capital Market mainly deals in the trading Money Market d
of medium and long-term securities short-term securi
wherein, the maturity period is more than period can vary f
one year. maximum of one
Liquidity Capital market securities are liquid in The securities tra

nature as they are tradable on stock nature. DFHI dis
exchanges, but are less liquid in securities and off
comparison to the money market securities. them.
Returns Expected Expected returns

Expected returns are higher due to the duration. 
possibility of capital gains in long-term and Share
regular dividends or bonus.
Instruments Instruments trade

Instruments traded in capital market comprise of treas
comprise of equity shares, preference bills, certificate o
shares, debentures, bonds and other long short-term securi
term securities.
Risk Money market se

Capital market securities involve greater to short time per
risk in terms of repayment of the principal position of the is
amount.
Page No 290:
Question 5:
What are the functions of a Stock Exchange?
ANSWER:
Stock Exchange refers to a market where buying and selling of the existing securities take
place. The following are the main functions of a stock exchange.
(i) Provides Liquidity and Marketability: Stock exchange provides a ready platform for
trading of existing securities. In other words, it provides a continuous market for the sale and
purchase of securities. Through stock exchange, securities can be easily converted into cash
whenever required. In addition, long-term securities can be converted to medium-term and
short-term through stock exchange.
(ii) Determination of Prices: A stock exchange helps in establishing the price of the
monetary assets that are traded in that market. It provides a platform for interaction for
buyers and sellers of securities and thereby, helps in the determination of prices of the
securities through the forces of demand and supply.
(iii) Fair and Safe Market: As stock exchange is a legal and well regulated market. It trades
within the defined and the existing legal framework. Thereby, it ensures safety and fairness in
transactions.
(iv) Facilitates Economic Growth: In a Stock Exchange the securities are continuously
brought and sold. This continuous process of disinvestment and reinvestment helps in
channelising the savings and the investments to the most productive use. This, enhances
capital formation and economic growth.
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(v) Spreading Equity Cult: Through regulation of the issues and better trading practices, a
stock exchange helps in educating the people about investment. It promotes and encourages
the people to invest in ownership securities.
(vi) Acts as an Economic Barometer: Through changes in the share prices, a stock
exchange indicates the changes in economic conditions. For instance, a boom (or recession)
is reflected in the rise (or fall) in the share prices.
(vii) Scope for Speculation: It is generally believed that certain degree of speculation is
necessary for better liquidity and to maintain demand and supply of securities. Stock
exchange provides a reasonable and controlled scope of speculation within the provisions of
law.
Page No 290:
Question 6:
What are the objectives of the SEBI?
ANSWER:
Securities and Exchange Board of India (SEBI) was established for promoting an orderly and
healthy growth of the securities market in India. The following points highlight the overall
objectives of SEBI.
(i) Regulation: The basic objective of SEBI is to regulate the functioning of stock exchange
and the securities market. It aims at providing a place where the issuers of securities (i.e.
companies) can raise funds in an easy and confident manner.
(ii) Protection: SEBI works on educating the investors and provide guidelines related to
investment. It provides them adequate and reliable information about the companies and
thereby, helps them in taking wise and informed investment decisions.
(iii) Prevention: To combat the malpractice in trading of securities was the basic reason for
the establishment of SEBI. Malpractice such as insider trading, violation of rules and
regulations, non-adherence to Companies Act, etc. erodes the confidence of investors. SEBI
aims at checking these malpractice by creating a balance between the self regulation of a
business and the legal statutory regulations.
(iv) Code of Conduct: Through regulation, SEBI develops a code of conduct for the fair trade
practices by the intermediaries such as brokers, merchant bankers, underwriters, etc. SEBI
controls the activities of these intermediaries and provides them a professional and
competitive environment.
Page No 290:
Question 7:
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State the objectives of the NSE.
ANSWER:
National Stock Exchange of India was incorporated in the year1992. It was recognised as
Stock Exchange in 1993 and started operations in 1994. It was established by leading banks,
financial institutions, insurance companies and financial intermediaries. NSE was established
with the following objectives.
(i) NSE aimed at setting up a single nationwide trading system for providing the trading facility
in all types of securities. Such a system increases the confidence of the investors.
(ii) It ensured that all the investors over the country get an easy and equal access through an
appropriate communication network. It increases the liquidity of the securities. Under the
system of regional stock exchange the number of people involved in the transaction was
limited. As against this, NSE incorporates transactions from investors from the entire country
and thereby, increases the liquidity of the securities.
(iii) By using an electronic trading system, NSE aims at providing a fair, efficient and
transparent securities market. Any person can get information regarding the trading of
various securities from the local terminals of NSE. Thereby, it helps in reducing fraud in
trading.
(iv) One of the objectives of NSE includes enabling shorter settlement cycles and book entry
settlements.
(v) NSE aimed at meeting the international standards and benchmarks of stock exchange.
Page No 290:
Question 1:
Explain the various Money Market Instruments.
ANSWER:
Money Market refers to the market where short term funds are traded. Herein, short term
funds are in the form of monetary assets having a maturity period of maximum one year. The
following are some of the common money market instruments.
(i) Treasury Bil (T-Bills)
Treasury Bill refers to a promissory note used for short term borrowing by the government.
They are the most commonly used money market instrument. They are auctioned and issued
by the Reserve Bank of India on behalf of the Central Government. T-bills are available for a
minimum of Rs 25,000 and in multiples thereof. Generally, three types of treasury bills are
issued 91-days, 182-days and 364-days. T-Bills are issued at a discount and redeemed at
par. That is, they are issued at a price lower than their face value and at the time of
redemption, the investor gets the amount equal to the face value. The difference between the
value at which they are issued and the redemption value is the interest received on them. For 
example, if an investor purchases a 182-days treasury bill with a face value of Rs 56,000Sharefor
Rs 50,000. At the time of maturity, the investor will receive Rs 56,000. Thus, the difference of
Rs 6,000 (56,000 − 50,000) is the interest receivable on the bill. T-Bills are also called Zero-
Coupon Bonds. T-bills are highly liquid bonds. Moreover, as they are issued by the RBI, they
have negligible risk and offer assured return.
(ii) Call Money
Call money is an instrument used for interbank transactions. Through call money, the banks
borrow from each other to meet any shortage of funds required to maintain CRR. That is, any
bank in shortage of funds borrows from other bank having surplus funds. Call money have a
very short maturity period ranging from one day to fifteen days. Interest paid on such loans is
known as call rate. Call rate is highly volatile and varies from day to day. There exists a
negative relationship between call rate and other money market instruments such as
Commercial Papers and Certificate of Deposits. That is, as the call rate rise, other
instruments of money market become cheaper and their demand increases.
(iii) Commercial Paper (CPs)
Commercial paper is an unsecured short term money market instrument. It is a negotiable

and transferable promissory note with a maturity period ranging from a minimum of 15-days
to a maximum of one year. They were introduced in India in 1990. CPs are mainly issued by
large and creditworthy companies to raise short-term funds. Large companies view
Commercial Papers as an alternative to bank borrowings and borrowings through capital
market. The rate of interest payable on Commercial Papers is lower than the market rates.
Generally, companies use Commercial Papers for bridge financing. That is, to raise the funds
required to meet the floatation cost incurred on long term borrowings in the capital market.
For example, if a company wishes to raise finance from the capital market to purchase land.
For this, it will have to incur floatation cost such as cost related to brokerage, commission,
advertising, etc. To finance such floatation costs the company can issue Commercial Paper.
(iv) Certificate of Deposit (CDs)
Certificate of Deposits are time deposits which are negotiable and unsecured in nature. They
are bearer instruments for a short and specified time period ranging from one month to more
than five years. CDs are a secured form of investment, which are issued to individuals,
corporations and companies by the commercial banks and development financial institutions.
Herein, higher interests are offered for higher deposits. They are issued to meet the demand
for credit in times of tight liquidity position. For example, when a person buys a CD by
depositing a specific amount, he receives a certificate wherein the term of deposit, the
interest rate applicable and the date of maturity is written. On the date of maturity, the
individual gets entitled to receive the principle amount and the earned interest on it.
(v) Commercial Bill
Commercial bill also known as bank bill or bill of exchange refers to the instrument used to
finance the working capital requirements of a firm. It is a short term negotiable instrument.
Companies use Commercial Bills to finance their credit sales. For example, when an
individual makes credit sales, the buyer becomes liable to make the payment on a specified
future date. Herein, the seller draws a bill of exchange and gives it to the buyer mentioning a
specific maturity period. Once the bill is accepted by the buyer it becomes a marketable
instrument which can be discounted with a bank. For instance, if the seller requires funds
before the maturity period, he can discount the bill with a commercial bank.
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Page No 290:
Question 2:
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What are the methods of floatation in Primary Market?
ANSWER:
The following are the various methods through which floating of new issues can be done.
(i) Offer through Prospectus
The most commonly used method for raising funds in primary market is offer through
prospectus. It involves inviting the subscriptions from public by issue of prospectus. A
prospectus is published as advertisements in newspapers, magazines, etc. It provides such
information as the purpose for which the fund is being raised, company’s background and
future prospects, its past financial performance, etc. Such information helps the public and
the investors to know about the company as well as the potential risk and the earnings
involved. Such issues need to be listed on one of the stock exchanges and should be in
accordance with the guidelines and rules listed under the Companies Act and SEBI
disclosure.
(ii) Offer through Sale
As against offer through prospectus, under the offer through sale method, the company does
not issue securities directly to the public rather they are issued through intermediaries such
as brokers, issuing houses, etc. That is, under offer through sale, securities are issued in two
steps, first the company sells its securities to the intermediaries at the face value and later
the intermediaries resell the securities to the investing public at a higher price than the face
value to earn profit.
(iii) Private Placement
Under this method, the securities are sold only to some selected individuals and big
institutional investors rather than to the public. The companies either allot the securities
themselves or they sell the securities to intermediaries who in turn sell them to selected
clients. This method saves the company from various mandatory or non-mandatory expenses
such as cost of manager fees, commission, underwriter fees, etc. Thus, the companies which
cannot afford the huge expenses related to public issue often go for private placement.
(iv) Rights Issue
Under the Companies Act 1956, it is the right of the existing share holders of a company to
subscribe to the new shares issued by it. The existing share holders are offered subscription
of new shares of the company in proportion to the number of shares possessed by them.
(v) e-IPOs
It is system of issuing securities through online system. If a company decides to offer its
securities through an online system it is required to gets into an agreement with the stock
exchange. This is called Initial Public Offer (IPO). Company appoints brokers for accepting
applications and placing orders. A company can apply to get listed in any stock market except
from the one through which it has already offered securities. Herein, the lead manager looks
upon the various activities and coordinates them. 
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Page No 290:
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Question 3:
Explain the recent Capital Market reforms in India.
ANSWER:
A capital market refers to the market that deals in the trading of medium and long-term
securities. That is, it deals in those securities that have a maturity period of greater than or
equal to one year. Capital market comprises of instruments such as equity and preference
shares, debentures, bonds, mutual funds, public deposits, etc. A capital market can be
divided in two parts namely, Primary Market and Secondary Market. Primary market deals
with issue of new securities. Issue of new securities in the primary market directs funds
towards those entrepreneurs who either want to start a new enterprise or wish to expand the
existing one. Secondary market, on the other hand, deals in the sale and purchase of the
existing securities. That is, it deals in the trading of those securities that were initially issued
in the primary market.
The history of capital market in the form of stock exchange dates back to the eighteenth
century. The Government of India introduced the Companies Act in 1850 with the aim of
generating investor interest in corporate securities. The first stock exchange was set up in
India in the year 1875 as 'The Native Share and Stock Brokers Association' in Bombay. Later
it was renamed as 'Bombay Stock Exchange' (BSE). In the subsequent years stock
exchanges were developed in Ahemdabad, Calcutta and Madras.
In 1990s, the Indian secondary market only consisted of regional stock exchanges wherein,
first being the BSE. However, after the reforms of 1991, the Indian Stock Market acquired a
three-tier system. This consisted of Regional Stock Exchanges, National Stock Exchange
and Over the Counter Exchange of India (OTCEI).
Regional Stock Exchange
The first Regional Stock Exchange was developed in Ahemdabad as Ahmedabad Stock
Exchange (ASE) in 1894. Similarly, in 1908, Calcutta Stock Exchange (CSE) was
established. Subsequently in the later years other regional stock exchanges were established
in Calcutta, Madras, Ahemdabad, Delhi, Hyderabad and Indore. Recently, regional stock
exchanges were developed in Coimbatore as Coimbatore Stock Exchange and in Meerut as
Meerut Stock Exchange. Currently, there are 22 regional stock exchanges in India.
National Stock Exchange
The NSE is the latest technology driven stock exchange which was recognised in 1993. It
started its operations in 1994 with trading in money market securities. Later, it also expanded
its trading operations in capital market segment. NSE was set up in order to establish a
nationwide platform for trading in all types of securities. It ensured development of fair and
efficient securities market. Within the span of its existence, NSE has transformed the Indian
capital market and has been able to take the stock market to the investor's door step. It has
provided a wide screen-based automated trading system across the nation ensuring equal
access to all the investors. 
Share
Over the Counter Exchange of India (OTCEI)
OTCEI is a company which was set up in 1990 under the Companies Act,1956 but later was
recognised as a stock exchange under the Securities Contracts Regulation Act, 1956. It
commenced its operations in trading in 1992 and is modelled along the lines of NASDAQ, the
OTC exchange in USA. It aims at providing the small companies an easy access to the
capital market. OTCEI provides a screen based nationwide trading system, that acts as a
place where buyers meet the sellers and negotiate for an acceptable terms of trade. Herein,
dealers can trade both in new issue of securities as well as secondary market. It is a single
window exchange which provides a convenient, transparent and efficient avenue for capital
market investment.
Page No 290:
Question 4:
Explain the objectives and functions of the SEBI.
ANSWER:
The Securities and Exchange Board of India was established in 1988 in order to encourage
an orderly and healthy growth of the securities market. SEBI was set with an overall objective
of investor protection and to promote the development and regulation of the functions of the
securities market. The following are the listed objectives.
(i) Regulation: The main objective of SEBI was to regulate the functioning of the stock
exchange and the securities market. It aims at providing a place where the issuers of
securities (i.e. companies) can raise funds in an easy and confident manner.
(ii) Protection: SEBI educates the investors by providing them valuable information regarding
various securities and companies. It provides them with the guidelines related to efficient
investment. It provides them adequate and reliable information about the companies and
thereby, helps them in taking wise and informed investment decisions.
(iii) Prevention: To combat the malpractice in trading of securities was the basic reason for
the establishment of SEBI. Malpractice such as insider trading, violation of rules and
regulations, non-adherence to Companies Act, etc. erodes the confidence of investors. SEBI
aims at checking these malpractice by creating a balance between the self regulation of a
business and the legal statutory regulations.
(iv) Code of Conduct: Through efficient regulation, SEBI aims at developing a code of
conduct for fair trade practices by intermediaries such as brokers, merchant bankers,
underwriters, etc. This helps in making them competitive and professional.
To attain the aforementioned objectives, SEBI perform 3 main functions namely, Regulatory,
Development and Protective functions. The following are the functions performed by SEBI.
(i) Regulatory Functions
• Registration: One of the regulatory functions performed by SEBI is the registration of the 
brokers, sub-brokers, agents and other players in the market. Registration of collective Share
mutual schemes and Mutual Funds is also done by SEBI.
• Regulating the Work: SEBI regulates the working of the stock brokers, underwriters,
merchant bankers and other market intermediaries. It frames rules and regulations for the
working of the intermediaries. SEBI also regulates the takeover bids by the companies. It
conducts regular enquires and audits of stock exchange and intermediaries.
• Regulation by Legislation: SEBI performs and exercise various other powers which are
delegated by the Government of India under the Securities Contracts (Regulation) Act, 1956.
Besides, it levies fee or other charges for carrying out the purposes of the Act.
(ii) Development Functions
• Training: SEBI promotes the training and development of the intermediaries of the securities
market in order to promote healthy growth of the securities market.
• Research: By conducting research in the required and important areas of the securities
market, SEBI publishes useful information. This helps the investors and other market players
to make wise investment decisions.
• Flexible Approach: SEBI has adopted a flexible and adaptive approach such permitting
internet trading, IPOs, etc. Such measures promote the development of capital market.
(iii) Protective Functions
• Prohibition: SEBI prohibits fraudulent and unfair trade practices. It prevents the spreading of
misleading and manipulative statements which are likely to affect the working of the securities
market. SEBI educates the investors by providing them valuable information regarding
various securities and companies so as to enable them to make wise investment decisions.
• Checks on Insider Trading: Insider trading refers to a situation where an individual

connected with the company leaks out crucial information regarding the company. Such
information may adversely affect its share prices. SEBI keeps a strict check on such insider
trading.
• Promotion and Protection: SEBI encourage fair trade practices and promotes a code of
conduct for the intermediaries. It undertakes step for investor protection and education. It
also checks the manipulation of price of securities.
Page No 290:
Question 5:
Explain the various segments of the NSE.
ANSWER:
The National Stock Exchange is the technology driven stock exchange which was
incorporated in 1992. It was recognised as a stock exchange in 1993 and started operations
in the year 1994. NSE provides trading in two main segments namely, Whole Sale Debt
Market Segment and Capital Market Segment. 
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(i) Whole Sale Debt Market Segment
This segment provides a platform for trading in fixed income securities such as state
development loans, bonds issued by public sector undertaking, corporate debentures,
commercial paper, mutual funds, central government securities, zero coupon bonds, treasury
bills, etc. NSE started operations in Whole Sale Debt Market in June 1994. It is the first fully
screen based system for trading in debt market. That is, it is the first computer based trading
system. Trading in the debt market involves two parties- trading members (which are the
recognised brokers of NSE) and the participants (i.e. the buyers and sellers of securities).
The transactions among the participants are settled through members. For instance, the
members place an order for the seller of a security which is then suitably matched by another
member for buyer of a security wishing to purchase that security. An order remains in the
system until it is suitably matched. This segment of NSE is also known as NEAT (National
Exchange for Automated trading).
(ii) Capital Market Segment
Under this segment, NSE deals with trading in equity shares, preference shares, debentures,
exchange traded funds as well as retail Government securities. It provides an efficient and
transparent platform for a fair trading system. The capital market segment commenced its
working in November 1995. The trading system of NSE Capital Market segment is also
known as the National Exchange for Automated Trading − Capital Market (NEAT- CM). The
trading operations of the Capital Market segment remain the same as in the Whole Sale Debt
market system.
Page No 292:
Question 1:
‘R’ Limited is a real estate company which was formed in 1950. In about 56 years of its
existence the company has managed to carve out a niche for itself in this sector. Lately, this
sector is witnessing a boom due to the fact that the Indian economy is on the rise. The
incomes of middle class are rising. More people can afford to buy homes for themselves due
to easy availability of loans and accompanying tax concessions.
To expand its business in India and abroad the company is weighing various options to raise
money through equity offerings in India. Whether to tap equity or debt. market whether to
raise money from domestic market or international market or Combination of both? Whether
to raise the necessary finance from money market or capital market. It is also planning to list
itself in New York Stock Exchange to raise money through ADR’s. To make its offerings
attractive it is planning to offer host of financial plans products to its stakeholders and
investors and also expand it’s listing at NSE after complying with the regulations of SEBI.
(i) What benefits will the company derive from listing at NSE?
(ii) What are the regulations of SEBI that the company must comply with?
(iii) How does the SEBI exercise control over ‘R’ Limited in the interest of investors?
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Share
ANSWER:
(i) The company would derive the following benefits from listing on NSE.
1. It would ensure that investors all over the country get easy and equal access to the
securities of the company.

2. It would enable shorter settlement cycle and book entry settlement.
(ii) The following are the regulations of SEBI that the company must comply with:
1. The company must issue a prospectus with every application wherein the details of the
project as well as details about the company (management, history, objectives, etc.) must be
mentioned.
2. The subscription should be open for a minimum of 3 days and a maximum of 10 days.
3. The terms and regulations regarding the issue should be clearly mentioned such that
investors get a fair idea with regard to risks, returns from the instrument.
4. No collection agent should be appointed for the collection of application money.
(iii) The SEBI would exercise control in the following manner-

1. It would ensure that no unfair trade practices are followed by the company.
2. It would ensure that insider trading is not followed in any manner.
3. It would ensure that various terms and conditions with regard to the issue of shares is
properly and clearly disclosed to the investors.
Page No 293:
Question 2:
NSE Indices Word Markets

Index Current Prev. % CHG Index Current
NYSE
S&P CNX Nifty 3641.1 3770.55 -3.43% 8926.88 91
Composite
NASDAQ
CNX Nifty Junior 6458.55 6634.85 -2.66% 2350.57 24
Composite
DOW
CNX IT 5100.5 5314.05 -4.02% 12076 12
Jones I. A.
Bank Nifty 5039.05 5251.55 -4.05% S & P 500 1377.95 1
CNX 100 3519.35 3540.35 -3.32% Nikkei 225 16676.9 17
More
The above figures are taken from the website of national stock exchange of India. They
illustrate the movement of NSE stock indices as well as world stock indices on the date
indicated.
Questions 
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1. What do you mean by a stock index? How is it calculated?
2. What conclusions can you draw from the various movements of NSE stock indices?
3. What factors affect the movement of stock indices? Elaborate on the nature of these
factors.
4. What relationship do you see between the movement of indices in world markets and NSE
indices?
5. Give details of all the indices mentioned above. You can find information on the web or
business magazines.
ANSWER:
1. Stock index reflects the market behaviour with the help of a representative set of stocks. It
reflects how the prices of various securities change during a period of time. The following
methods can be used for the calculation of stock index:
i. Price weighted index: In this method certain sample shares are chosen, the sum of prices
of which is taken for a certain year or month or week or day with reference to a base year.
ii. Equal weighted index: This index takes the average of the price relatives of the sample
shares for a particular period with reference to a base year.
iii. Value weighted index: In this method the aggregate of market capitalisation is taken for
sample shares with reference to a base year.
2. According to the given data there is a fall in the index in all the sectors. This suggests a
situation of depression in the market.
3. The following factors affect the movement of stock indices:
i. Policies of the government: Liberalised policies of the government boosts economic

activity in the country, which in turn positively affects the stock index (i.e. shows a rising
trend).
ii. Political scenario in the country: A stable and positive political scenario in the country
offers a conducive environment for business and economic activities. Thereby, in stable
political condition the stock index tends to show a positive trend.
iii. Financial position of various countries: The stock index of one country is not just
dependent on its own financial position but also on the financial position of other countries of
the world. A good financial position of other countries positively affects the trade in the world
which in turn positively affects the stock index of various countries.
4. According to the data the world indices and the NSE indices show movement in the same
direction. This suggests a direct relation between the two. As the world index shows a
negative trend there is a negative trend in NSE as well.
5. The details of various indices are as follows.

i. S&P CNX Nifty: It is the National Stock Exchange of India. It is owned, managed and 
Share
controlled by the Indian Index services and products.
ii. CNX Nifty junior: Nifty junior is the index that represents securities after Nifty. It comprises
of 50 companies.
iii. CNX IT: It is an index comprising of the IT (software or hardware) stocks that are most
liquid and have high capitalisation. It helps he investors in comparing the performance of the
IT segment.
iv. Bank Nifty: It is an index comprising of the most liquid and high capitalisation stocks of the
banking sector. It helps the investors in keeping a track of the performance of the banking
sector.
v. CNX 100: It is an index that comprises of 100 stocks from 38 different sectors of the
economy. It is owned, managed and controlled by the Indian Index services and products.
vi. NYSE composite: This index comprises of various stocks listed on the New York Stock
Exchange (including foreign stocks, American Depository Stocks, real estate investment trust
and tracking stocks). In this way it is a representative of the market performance.
vii. NASDAQ composite: This index includes the stock listed on NASDAQ. An important
feature of this index is that it is not just limited to the stocks of companies having U.S
headquarters.
viii. Dow Jones IA: It refers to the price weighted average of 30 identified stocks that are
traded on New York stock exchange and NASDAQ.
ix. S&P 500: It is a stock market index comprising of those 500 companies that are commonly
listed on New York stock exchange or NASDAQ.
x. Nikki 225: It is a Japanese stock index comprising of 225 top Japanese companies listed
on the Tokyo Stock Exchange.
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4/13/23, 9:29 AM NCERT Solutions for Class 12 Commerce Business studies Chapter 2 - Financial Markets

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NCERT Solutions for Class 12 Commerce

NCERT Solutions  Class 12  Business Studies  Financial Markets

Primary and secondary markets

(b) Complement each other

(c) Function independently

(d) Control each other

The total number of Stock Exchange in India is

The settlement cycle in NSE is

NSE commenced futures trading in the year

Clearing and settlement operations of NSE are carried out by

A Treasury Bill is basically

(a) An instrument to borrow short-term funds

(b) An instrument to borrow long-term funds

(c) An instrument of capital market

(d) None of the above

i) Transfer of Savings and Alternatives for Investment

ii) Establishes the Price

iii) Facilitates Liquidity

iv) Reduced Cost of Transaction

''Money Market is essentially a Market for short term funds''. Discuss.

What is a Treasury Bill?

Distinguish between Capital Market and Money Market.

Basis of Difference Capital Market Mo

Liquidity Capital market securities are liquid in The securities tra

Returns Expected Expected returns

Instruments Instruments trade

Risk Money market se

What are the functions of a Stock Exchange?

What are the objectives of the SEBI?

Explain the various Money Market Instruments.

(i) Treasury Bil (T-Bills)

(ii) Call Money

(iii) Commercial Paper (CPs)

Commercial paper is an unsecured short term money market instrument. It is a negotiable

(iv) Certificate of Deposit (CDs)

(v) Commercial Bill

What are the methods of floatation in Primary Market?

(i) Offer through Prospectus

(ii) Offer through Sale

(iii) Private Placement

(iv) Rights Issue

Explain the recent Capital Market reforms in India.

Regional Stock Exchange

National Stock Exchange

Explain the objectives and functions of the SEBI.

(i) Regulatory Functions

(ii) Development Functions

(iii) Protective Functions

• Checks on Insider Trading: Insider trading refers to a situation where an individual

Explain the various segments of the NSE.

(ii) Capital Market Segment

securities of the company.

(iii) The SEBI would exercise control in the following manner-

NSE Indices Word Markets

3. The following factors affect the movement of stock indices:

i. Policies of the government: Liberalised policies of the government boosts economic

5. The details of various indices are as follows.

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