1. What do you mean by Financial Market ? What are the functions of financial market ?
Ans- Financial market refers to the institutional arrangements for dealing in financial assets and credit instruments . A financial market acts as a link between saver and borrowers . Financial market may be further classified into two categories namely , money market and capital market. This market deals in short term and long term finances.
Functions of Financial market are as follows -
1. Intermediary for mobilisation of savings - Financial market acts as a link between savers and investors . The savings are transferred to those who need them for investments .
2. Provide liquidity to financial markets- Financial securities can be easily purchased and sold in financial markets , thus providing liquidity to financial markets .
3. Facilitate pricing of financial securities - Financial securities are traded in financial markets. The demand and supply of these securities helps in the determination of their prices .
4. Providing financial information - Financial information such as price , availability , cost of various securities is needed by the investors and these information are readily available at financial market .
5. Helping in economic growth - By channelising the funds from those who have surplus funds to those who need them , capital markets help in economic growth of the country .
2. What do you mean by Money market ? What are the instruments of money market ?
Ans - Money market refers to transactions involving borrowing and lending of money for short periods . The term money market can be used in a composite sense to mean financial institutions which deal in with short-term funds in the economy .
Instruments - 1. Call money - The surplus funds traded for a very short-period are known as call - money . it is generally related to surplus funds of banks . This loans are not given for a short - period , not exceeding 7 days under any circumstances .
2. Treasury bills- The treasury bills are promissory notes of government to pay a specified sum after a given period . This are sold by RBI on behalf of the government . The issue period of these bills ranges from 14 to 364 days .
3. Trade bills - There are commercial papers and are drawn by one party on the others. It is an unconditional order which is signed by the drawer requiring the drawee to pay on demand or at a fixed future time , a definite sum of money .
4. Commercial paper- A commercial paper is an unsecured promissory note issued by a corporate with a fixed maturity period varying from 3 to 12 months .
5. Certificate of deposit - A Certificate of Deposit can be issued only by a bank against a deposit kept by a company or an institution . These deposits varies from 91 days to 1 years.
Functions of Money market are as follows -
1. The basic functions of money market is to facilitate adjustment of liquidity position of commercial banks , business corporations and other non- bank financial institutions .
2. It provides outlet of investors of surplus funds .
3. It provides short - term funds even to government institutions .
4. It serves as a medium for Central Bank of the country , controlling the creation of credit .
5. It plays an vital role in the flow of funds to the most important uses.
3. What do you mean by Capital market ? What are its features ?
Ans - The term capital market refers to the institutional arrangements for facilitating the borrowing and lending of long - term funds . Capital market may be defined as an organised mechanism for effective and efficient transfer of money capital from the interesting public to entrepreneurs engaged in industry and commerce .
Nature / Features-
1. Source of long- term funds- Capital market meant to raise long - term sources for those who want to make productive investments .
2. Deals in equity and debt instruments - Capital market is used to raise owned capital and borrowed fund .
3. Primary and secondary market - Capital market consist of primary market and secondary market . Primary markets deals in new share while old shares are traded in secondary market .
4. Intermediaries - There are a number of intermediates like stock brokers, underwriters , banks etc who helped in conducting the transactions in capital market .
5. Mobilisation of savings - Capital market try to mobilise savings by offering different schemes to investors .
Functions - 1. Mobilisation of financial resources on a nation wide scale .
2. Securing foreign capital and know how to fill up the deficit in the required resources for economic growth at a faster rate.
3. Effective allocation of mobilised financial resources by directing the same to projects needed for the country .
4. What are the types of Capital Market ?
Ans - The types of Capital Market are -
1. Primary market .
2. Secondary market .
1. Primary market - ( New Issue Market )- Primary market is also known as New Issue Market . This market consists of issue of new securities like shares, debentures , that have never been previously issued are offered. Both the new companies and the existing companies can take capital on the new issued market .
Roles of Primary Market -
1. It channelizes saving for long term investments .
2. It deals with new issues of securities .
3. The savings are allocated in different sectors .
4. The savings are used for economic development of the country .
5. It deals with long term instruments of the equity and debt.
2. Secondary Market - These are also known as stock market , as it represents the market where existing securities are traded . Stock exchange provides an organised mechanism of purchase and sell of existing securities .
Role of Secondary market -
1. These markets deals with securities already in the market .
2. It provides ready market for purchase and sale of securities .
3. It helps in transfer of ownership .
4. These markets are properly regulated .
5. The investors are provided protection by regulating transactions .
5. What are the importance of Capital Market ?
Ans - 1. Mobilising savings - The capital market plays a vital role in mobilising savings to put them in productive investment so that the development of trade, commerce and industry could be facilitated . Capital market acts as a bridge between savers and investors .
2. Stability in value - In a developed capital market the experts in banking and non-banking intermediaries put in every report to stabilize the values of stocks and securities . Which facilitated to stable the rate of interest .
3. Encouragement of Economic growth - The process of economic growth is met easier through the capital market . The proper allocation of resources to the development of commerce, trade and industry .
4. Inducement to savings - Savings are the backbone of any nations economic development . Capital market helps in earning fair rate of return on savings .
6. Difference between Primary and Secondary Market ?
Ans - 1. Nature - Primary market channelizes savings in long - term investments .
Secondary market provides surplus funds for short term investments avenues.
2. Issues - Primary market deals with new issue of securities .
Secondary market deals with securities already in the market .
3. Coverage - Primary market covers securities of corporate sector only .
Secondary market helps all those who want to make investments in securities .
4. Time - The period of investment is long in primary market .
The period of investment is short - term and medium term in secondary market .
7. What are the differences between Money Market and Capital Market ?
Ans - 1. Money market provides finance for short term investment .
Capital market provides finance for long term investment .
2. The finance provided by money market is utilised usually for working capital .
The finance provided by capital market may be used both for fixed and working capital .
3. Money market acts as a link between the depositor and the borrower .
Capital market acts as a middlemen between the investor and the entrepreneur .
4. In money market underwriting is a secondary function .
In capital market underwriting is one of its primary activities .
8. What is Stock Exchange ? What are the functions of Stock Exchange ?
Ans- Stock Exchange are organised and regulated markets for various securities issued by corporate sector and other institutions . The stock exchange enable free purchase and sale of securities . It also allows trading in securities under certain rules and regulations .
Features - 1. It is a place where securities are purchased and sold.
2. A stock exchange is an association of person whether incorporated or not .
3. Both genuine investors and speculators buy and sell shares.
4. The securities of corporations trusts, government etc are allowed to be deal at stock exchanges .
Functions of Stock Exchange -
1. Ensure liquidity of capital - The stock exchange provide a place where shared and stocks are converted into cash . Therefore the exchanges provide a ready market for buyers and sellers .
2. Providing continuous market for securities - The stock exchange provide a ready market for securities . The securities ones listed continue to be traded at the exchanges irrespective of the fact that their owners go on changing .
3. Mobilising surplus savings - The stock exchange provide a ready market for various securities . The investors do not have any difficulty in investing their savings by purchase of shares, bonds etc.
4. Safety in Dealing - The dealing at stock exchanges are governed by well defined rules and regulations of Securities Contact Regulation Act, 1956. Thus their is no scope for manipulating transactions.
5. Helpful in raising new capital - The new and existing concerns want capital for their activities . The shares of new concerns are registered at stock exchanges and existing companies also sell their shares through brokers at exchanges . The exchange are helpful in raising capital both by new and old concerns .
6. Evaluation of securities - The investors can evaluate the worth of their holdings from the prices quoted at different exchanges for those securities. Stock exchanges are helpful in evaluating any type of security listed their .
9. Discuss about Securities Exchange Board of India ?
Ans - SEBI was set up in 1988 to regulate the functions of the securities market with a view to promote orderly and healthy development in the stock market . SEBI is a corporate body which is administered by a board having a Chairman and eight members . It has head office in Mumbai and Branch offices in Kolkata , Chennai and New Delhi .
Functions of SEBI are as follows -
A. Protective Function - SEBI is assigned the work of protecting the interest of investors in capital market .
1. Control on inside trading - SEBI keeps a watch on every trading as announcement of bonus , other benefits etc. and discourages such practice .
2. Safeguarding investors - SEBI issues press notes in the papers and brings out booklets for educating investors about various practices and warns about the malpractices also .
3. Enforcing code of conduct - SEBI prescribes code of conduct to be followed in the capital market for conducting the business smoothly .
B. Regulatory Functions -
1. Monitoring Stock Exchanges - SEBI regulates the working of stock exchanges by notifying rules and regulations.
2. Regulating Intermediaries - SEBI has also devised rules and regulations for the working of intermediaries like brokers , underwriters, banks etc.
3. Regulating Mutual Funds - All mutual fun are registered with SEBI and they are required to furnish information about their business to the SEBI.
C. Developmental Functions -
1. Registration - SEBI has made compulsory the registration of members of Stock Exchange , intermediaries , merchant bankers.
2. Floorless trading - The use of intermediaries for stock exchange trading has greatly helped in the development of capital market .
3. Monitoring Issues - With a view to reduce cost of new issues , SEBI had devised various measures.
