Class 12 Business Studies Chapter 10 Notes (Financial Markets)
Imagine your family saves money in a bank while a company needs funds to open a new factory. How does money move from savers to businesses, and where do shares fit in? That is exactly what you will understand through these Class 12 Business Studies Chapter 10 (Financial Markets) notes.
As a Class 12 BST student, you will understand the meaning and functions of financial markets, money market instruments, capital markets, and key differences between the money market and capital market.
Furthermore, you can explore primary and secondary markets, how a stock exchange works, the steps involved in share trading, and the roles of depositories, Demat accounts, and SEBI.
Before you proceed, below are the quick details:
- Class: 12
- Subject: Business Studies
- Chapter Number: 10
- Chapter Name: Financial Markets
Let's start.
Financial Markets
- A Financial Market is a market for the creation and exchange of financial assets.
- An economic system consists of two main sectors - households which save funds and business firms which invest these funds.
- A financial market helps to link the savers and the investors by mobilizing/Moving funds between them. (Allocative Function)
- It allocates or directs funds available for investment into their most productive investment opportunity. The process by which the allocation of funds is done is called financial intermediation.
- Financial markets exist wherever a financial transaction occurs.
- Financial transactions could be in the form of creation of financial assets such as the initial issue of shares and debentures by a firm or the exchange of existing financial assets like equity shares, debentures and bonds.
Functions of the Financial Markets
- Allocative function A financial market facilitates the transfer of savings from savers to investors. It gives savers the choice of different investments and thus helps to channelize surplus funds into the most productive use.
- Facilitating Price Discovery In the financial market, households are suppliers of funds and business firms represent the demand. The interaction between the forces of demand and supply helps to establish a price for a financial asset being traded in the financial market.
- Providing Liquidity to Financial Assets Financial markets facilitate easy purchase and sale of financial assets. Holders of assets can readily sell their financial assets through the mechanism of the financial market.
- Reducing the Cost of Transactions Financial markets provide valuable information about securities being traded in the market. It helps to save time, effort and money that both buyers and sellers of a financial asset would have to otherwise spend to try and find each other. The financial market is thus a common platform where buyers and sellers can meet for the fulfilment of their individual needs.
Types of Financial Markets
Financial Market
Money Market
Capital Market
Money Market
- Money market is a market for short-term funds which deals in assets whose period of maturity is up to one year. It enables the raising of funds for meeting the temporary shortages of cash and obligations and the temporary deployment/usage of excess funds for earning returns.
- A money market is a market where low-risk, unsecured and short-term debt instruments that are highly liquid are issued and actively traded every day. It has no physical location, but is an activity conducted over the telephone and through the Internet.
- Major Participants in the Money Market are:
- The Reserve Bank of India (RBI)
- Non-Banking Finance Companies
- Large Corporate Houses
- Commercial Banks
- State Governments
- Mutual Funds
- Instruments of Money Market are:
- Treasury Bill
- Commercial Paper
- Certificate of Deposit
Capital Market
- Capital market refers to institutional arrangements through which medium and long-term funds, both debt and equity are raised and invested.
- It does not deal with channelizing savings for less than one year.
- The capital market transfers money from savers to entrepreneurial borrowers/business.
- The capital market makes use of different intermediaries such as brokers, underwriters, depositories etc. These intermediaries act as working organs of the capital market and are very important elements of the capital market.
Differences Between the Money Market and the Capital Market
| Basis | Money Market | Capital Market |
|---|---|---|
| Participants | The participants are RBI, Commercial Banks, Non-Banking Finance Companies (NBFCs), State governments, Large Corporate Houses and Mutual Funds. | The participants are financial institutions, banks, corporates, foreign investors and retail investors. |
| Instruments | Treasury bills, commercial paper, certificates of deposits, call money, etc. | Equity Shares, Preference Shares, Debentures and Bonds. |
| Investment Outlay | Money market securities have a large investment outlay, minimum amount of Rs 25,000. | Capital market securities have a small investment outlay, i.e., Rs 10 or Rs 100. |
| Duration | The money market deals in short-term securities whose period of maturity is up to one year. | Capital market deals in medium-term and long-term securities with a period of maturity of more than one year. |
| Liquidity | Money market instruments enjoy a higher degree of liquidity. | Capital market securities are considered liquid but less liquid than money market securities. |
| Safety | The instruments of the money market are safe or less risky due to the short duration and soundness of issuers. | The instruments of the capital market are riskier concerning returns as well as principal repayment, as the issuing company may fail. |
| Expected Return | The expected return of the money market is less due to the short duration. | The expected return is higher in the capital market as along with regular dividends or interest there are chances of capital gain. |
Primary Market (New Issue Market)
- It deals with new securities being issued for the first time.
- Primary capital market directly contributes to capital formation because in primary market company goes directly to investors and utilizes these funds for investment in buildings, plants, machinery etc.
- Method of Flotation of Securities in Primary Market
- Public Issue Through Prospectus
- Offer for Sale
- e-IPOs (Electronic Initial Public Offer)
Secondary Market (Stock Exchange)
- The Secondary market is the market for the sale and purchase of previously issued or existing securities.
- Under this market, the securities are not directly issued by the company to investors.
- The securities are sold by existing investors to other investors.
- Sometimes the investor needs cash, and another investor wants to buy the shares of the company as he could not get it directly from the company.
- Then both investors can meet in the secondary market and exchange securities for cash through an intermediary called a broker.
Differences between Primary Market and Secondary Market
| Basis | Primary Market | Secondary Market |
|---|---|---|
| Securities Traded | It involves the issue of securities by new companies or new issues of securities by existing companies to investors. | It involves trading existing shares only. |
| Company Involvement | Securities are sold by the company to the investors directly. | Ownership of existing securities is exchanged between investors. The company is not involved at all. |
| Capital Formation | It directly promotes capital formation. | It indirectly promotes capital formation. |
| Buying/Selling | Only buying securities takes place. | Both buying and selling of securities take place. |
| Price Determination | Prices are determined by the management of the company. | Prices are determined by the forces of demand and supply of securities. |
| Location | It has no fixed geographical location. | It has a fixed geographical location. |
Stock Exchange
Stock exchange is defined as an organization constituted for the purpose of assisting, regulating/controlling of business of buying, selling and dealing in securities.
Functions of Stock Exchange/Secondary Market
- Safety of Transactions - In the stock market, only the listed Securities are traded.
- Contributes to Economic Growth - In the stock exchange, existing securities of various companies are bought and sold. This process of disinvestment and reinvestment helps to invest in the most productive investment proposal, and this leads to economic growth.
- Spreading of Equity Cult - Stock exchange encourages people to invest in Equity by better trading practices and educating the public about investment.
- Promotes the Habits of Savings and Investment - The Stock market encourages people to save more and invest in securities rather than investing in gold, silver, etc.
- Pricing of Securities - Share prices on a ‘Stock Exchange’ are determined by the forces of demand and supply. A stock exchange is a mechanism of constant valuation and it provides instant information to both buyers and sellers in the market.
Steps in the Trading Procedure on a Stock Exchange
- Selection of the Broker
- Opening a DEMAT account
- Placing an Order
- Match the Share and Best Price
- Executing the Order
- Issue of Contract Note
- Delivery of Shares and Making Payments
- Settlement
- Selection of the Broker - The buying and selling of securities can only be done through SEBI-registered brokers who are members of the stock exchange. The broker can be an individual, partnership firm or corporate bodies.
- Opening a DEMAT account - The broker opens a trading account in the name of the investor after taking details such as PAN number; Date of birth and address; Educational qualification and occupation; Residential status; Bank account details; Name of any other broker with whom registered.
- Placing an Order -The order can be placed with the broker either personally or through phone, email, etc. The Investor must place the order very clearly specifying the range of prices at which securities can be bought or sold.
- Match the Share and Best Price - The broker will then go online and connect to the stock exchange and match the share and best price available.
- Executing the Order - When the shares can be bought and sold at the price mentioned, it will be communicated to the broker terminal, and the order will be executed electronically. The broker will issue a trade confirmation slip to the investor.
- Issue of Contract Note - After the trade has been executed the broker issues the contract note within 24 hours. This note is an important legal document as it helps to settle disputes or claims between investors and the broker and contains the details like No. of shares bought and sold, price, date, time of the deal, brokerage charges.
- Delivery of Shares and Making Payments - Now the investor must deliver the shares sold or pay cash for the shares bought to the broker. This should be done immediately after receiving a contract note. This is called pay-in-day.
- Settlement - Cash is paid or securities are delivered to the stock exchange by the broker on pay-in-day, the stock exchange will deliver the shares or make payment to the other broker. This is called pay-out day. The broker must make payment to the investor within 24 hours of the pay-out day. The broker can make delivery of shares in Demat form directly to the investor's Demat Account.
Depositories
Depository
→
Depository Participant
→
Investor
- A depository is an institution or an organisation which holds securities.
- At present in India, there are two depositories a) NSDL (National Securities Depository Ltd.) b) CDSL (Central Depository Services Ltd.) Ø There is no direct contact between the depository Depositories National Securities Depository Ltd. Central Depository Services Ltd. Investor and the investor. The depository interacts with investors through depository participants only.
Dematerialization
- Dematerialisation refers to holding securities in electronic form. For this purpose, the investor must open a Demat Account and SEBI has now made it mandatory to trade in Demat Form.
- Holding shares in Demat form is very convenient as it is just like a bank account.
- Various securities of different companies can be held in a single Demat account.
- This is mainly done to eliminate problems associated with share certificates like theft, fake transfers etc.
SEBI (Securities Exchange Board of India)
- SEBI was set up in 1988 to regulate the functions of the securities market.
- With the growth in the dealing with stock markets, lots of malpractices also started in the stock markets Such as price rigging, unofficial premium on new issue, delay in delivery of shares, violation of rules and regulations of the stock exchange.
- Due to these malpractices, customers started to lose confidence and faith in the stock exchange. Hence the government of India decided to set up an agency to protect the interest of investors.
Objectives of SEBI
- To develop a code of conduct for intermediaries like brokers.
- To regulate stock exchanges.
- To protect the rights and interests of investors
Functions of SEBI
Protective Functions
These are performed by SEBI to protect the interest of investor and provide safety of investment.
- Check a Price Rigging: Price rigging refers to manipulating the prices of securities with the main objective of inflating or depressing the market price of securities. SEBI prohibits such practices because this can defraud and cheat the investors.
- It Prohibits Insider Trading: An insider is any person connected with the company such as Directors, Promoters etc. These insiders have sensitive information which affects the prices of securities.
- SEBI Prohibits Fraudulent and Unfair Trade Practices: SEBI does not allow the companies to make misleading statements which are likely to induce the sale or purchase of securities.
- SEBI Spreads Awareness by Educating Investors: SEBI undertakes steps to educate investors so that they can evaluate the securities of various companies and select the most profitable Securities.
Developmental functions
These are performed by SEBI to promote and develop activity in the stock exchange.
- SEBI promotes training of intermediaries of the securities market .
- SEBI has permitted internet trading through registered stockbrokers.
Regulatory functions
These are performed to regulate the Stock exchange.
- SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries such as bankers, brokers, underwriters etc.
- SEBI registers and regulates the working of stockbrokers, sub-brokers, share transfer agents, and all others who are associated with the stock exchange in any manner.
- SEBI regulates takeover of the companies.
- SEBI conduct inspections and audit of the stock exchange.
- SEBI registers and regulates the working of mutual funds etc.
The End
A List of Notes:
Chapter 1 |
Chapter 2 |
Chapter 3 |
Chapter 4 |
Chapter 5 |
Chapter 6 |
Chapter 7 |
Chapter 8 |
Chapter 9 |
Chapter 10 |
Chapter 11 |
Chapter 12
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Notes are very beneficial....the language of notes is also very easy ...thanks for the notes ☺️
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