CBSE Board Class 12 Business Studies chapter

1. FINANCIAL MARKET
EXAM NOTES
FROM
NCERT BOOK

2. Working Capital Requirements
1) FINANCE NEEDS
Fixed Capital Requirements
2) Economic System(of which business is a part)
3)Market helps to link the savers and investors by mobilizing funds is
financial market.This is also called ALLOCATIVE FUNCTION OF
FINANCIAL MARKET.
4)
Economic System (of which business is a part)
Households
(save funds)
Business firms
(invest funds)
When allocative function perform well
Higher rate of return
to households
Allocation of scarce
resources to firms

3. 5)Allocative function is performed by both banks and financial
market.
6)Process by which allocation of funds is done is called financial
intermediation.
7)FINANCIAL MARKET It is a market for the creation and
exchange of financial assets.
8)Financial market exists where financial transaction occur.
9) Financial Transactions
Creation of financial
assets
Sale or purchase of
existing financial asset

4. FUNCTIONS OF FINANCIAL MARKET
 Mobilisation of savings and channeling them into the most
productive uses::::::Savers Investors
 Facilitating price discovery::::::Suppliers Households
Demanders Business Firm
 Providing liquidity to financial assets::::::Sell financial assets
through mechanism of financial market.
 Reducing the cost of transaction::::::Providing valuable
information.Save time,effort and money.Common platform for
buyers and sellers.

5. CLASSIFICATION OF FINANCIAL
MARKET

6. FINANCIAL MARKET-MONEY MARKET
 Make assets close substitute for money.
 Low risk,unsecured,no physical location,highly liquid,traded
everyday,conducted over telephone and internet.
 Meet temporary shortages
 Deployment (putting into use) of excess funds
 PARTICIPANTS-Reserve bank of India,commercial banks,non
banking finance companies,state govt,large corporate houses
and mutual funds.

7. MONEY MARKET
INSTRUMENTS
Treasury bill ,Commercial Paper,Call money,Certificate of
Deposit,Commercial Bill in details…….

8. INSTRUMENT-TREASURY BILL
 Also known as zero coupon bonds.
 Instument of short term borrowings used by Govt of India.
 Issued by RBI on behalf of government.
 Issued in terms of promissory notes.
 Highly liquid ,negotiable risk of default.
 Issued price is lower than face value.Repaid at par.The difference between issue
price and redemption price is interest recievable called discount.
 Minimum Amount---Rs 25000.

9. INSTRUMENT-COMMERCIAL PAPER
 Unsecured,promissory notes,negotiable and transferable.
 Issued by large and credit worthy companies.
 Lower rate of interest than market rates.
 Serve as alternative to bank borrowing.
 Maturityperiod::15 days to 1 year
 Use mostly for the purpose of bridge financing.
 ***BRIDGE FINANCING***
Funds raised through commercial paper are used to meet the floatation cost.This is
known as bridge financing.

10. INSTRUMENT-CALL MONEY
 Short term finance repayable on demand
 Used for inter bank transactions
 It is a method by which banks borrow from each other to be able to maintain the
cash reserve ratio.
 Maturity period—1day to 15 days.
******Call rate ******
 The interest rate paid on call money is known as the call rate.
 It is a volatile rate varies from day to day and hour to hour.
 Inverse relationship between call rate and money market instruments.

11. INSTRUMENT-CERTIFICATE OF DEPOSIT
 Unsecured ,negotiable ,bearer formof instrument
 Issued by commercial banks and development financial institutions
 Issued to individuals,corporations and companies during tight liquidity and high
credit demand.
 Issued for a period between 91 days and 1 year.
 Can be endorsed after 45 days of issued
 Minimum face value---5lakhs.

12. INSTRUMENT-COMMERCIAL BILL
 When a trade bill is accepted by commercial bank it is known as commercial bill.
 It is generally used for sale purposes.
 By this –buyer gets goods on credit
seller gets his money
These are the common money market instruments used by
different institutions.

13. CAPITAL MARKET-It refers to facilitates and institutional arrangements
through which long term funds are raised and invested.ideal capital market
is finance available at reasonable cost.
Capital market
 Participants are financial institutions
,banks ,foreign investors and retailers.
 Instrument are shares,debentures,
bonds etc.
 Entail less investment outlay is low
 Medium and long term securities.
 Less degree of liquidity.
 Expects higher return
Money market
 Participants are RBI,banks,financial
institutions and companies.
 Instruments are t- bills,commercial
paper etc.
 Entail huge sum of money
 Maximum tenure is 1 year
 Higher degree of liquidity
 Expects less return

14. • The Discount Finance House of India(DFHI) has
been established to provide a ready market for
money market instruments.
• Reason for higher rate of return in capital market:
1. Earning capital gains in equity shares.
2. Prosperity of company is shared by shareholders
by way of higher dividends and bonus shares.
• Capital market is of two types :
1. Primary market
2. Secondary market

15. CAPITAL MARKET-PRIMARY MARKET
 Also known as new securities market.
 Securities is issued for first time.
 Investors are banks,financial institutions,insurance companies,mutual funds and
individuals.
 Funds are raised for setting up new
projects,expansion,diversification,modernization of existing products ,mergers,
takeovers.
 Only buying of securities take place by investors

16. METHOD OF FLOATATION
1) Offer through prospectus:Most popular method of raising funds by public
compaies. Involves inviting subscription from public through issue of
prospectus.
2) Offer for sale: Securities offered for sale through issuing houses and stock
brokers.
3) Private placement: It is the allotment of securities by a company to
institutional investors and some selected individuals .
4) Right issue: Right given to existing shareholders to subscribe new shares.
5) E-IPOs: Issue capital to public through online system of stock exchange has to
enter into agreement with stock exchange .

17. CAPITAL MARKET-SECONDARY MARKET
 The secondary market is also known as stock market and stock exchange.
Working of
secondary
market
Stock
exchange
Sale of
existing
securities
Existing
invesrtors to
disinvest
Provide
liquidity and
marketability
Fresh
investrors to
enter the
market
Purchase of
existing
securities

18. • According to Securities contract Act 1956,stock exchange means any
body of individuals whether incorporated or not,constituted for the
purpose of assisting ,regulating or controlling the business of buying
and selling or dealing in securities.
• Basic function of a stock exchange is the creation of a continuous
market where securities are bought and sold.
• Stock exchange is govern by market forces.
• Bombay Stock exchange was first stock exchange of india set up in 1875
as the Native Share and Stock Brokers Association in Bombay. It was
first stock exchange of ASIA
• Indian three tier secondary market(after 1991 reforms) is:
1. Regional Stock Exchange
2. National Stock Exchange(NSE)
3. Over the counter Exchange Of India(OTCEI)

19. FUNCTIONS OF STOCK EXCHANGE
1. Providing liquidity and marketability to existing Securities.
2. Pricing of securities(determine by market forces)
3. Safety of transactions
4. Contributes to Economic Growth
5. Spreading of Equity cult
6. Providing scope for speculation
National Stock Exchange(NSE)
Incorporated in 1992
Recognised in April 1993
Started operation in 1994
Launched capital Market Segment in Nov 1994
Bullish Phase-Good
things will happen
Bearish Phase-Bad
things will happen

20. Bourses is another word for stock market
Within 10 years NSE achieved its objectives
There are two market segments of NSE
Wholesale Debt Market(Govt securities)
Capital Market Segment(Retail long term securities)
BSE institute ltd provides education on financial market formed by BSE
SENSEX is the benchmark Index of BSE
SENSEX is launched in 1986 made up of 30 stocks represent 13 sectors of economy
SEBI was established by Govt of India on 12 April 1988 function under Ministry Of Finance Of Govt of India
Statutory Status on 30 Jan 1992 ordinance
Ordinance was replaced by SecuritiesAnd Exchange Board Of India Act ,1992
There are two depositories of Stock Exchange-
National Securities Depository Ltd
Central Depository Service Ltd