Financial Markets

Question 1:

Name any two details that need to be provided by the investor to the broker while filling a client registration form.

Answer:

While filling a client registration form, the details provided by the investors to the broker are:

  1. PAN Number
  2. Date of birth and address
  3. Bank account details
  4. Depository account details
  5. Client code number in the client registration form.

Question 2:

What is the common name for Beneficiary Owner Account, which is to be opened by the investors for trading in securities?

Answer:

A beneficial owner is a person who enjoys the benefits of ownership even though title to some of property is in another name.

The investor has to give details of his demat account and instruct his depository participant to take delivery of securities directly in his beneficial owner account.

Question 3:

State any two reasons why investing public can expect a safe and fair deal in the stock market. (Point w.r.t safety of Transactions – Functions of the Stock Exchange).

Answer:

The membership of a stock exchange is well-regulated and its dealings are well defined according to the existing legal framework.

This ensures that the investing public gets a safe and fair deal on the market.

Question 4:

Name the segments of the National Stock Exchange (NSE).

Answer:

National stock exchange: 

It started operations in 1994, with trading on the wholesale debt market segment. The NSE was setup by leading financial institutions, banks, insurance companies and other financial intermediaries. It is managed by professionals, who do not directly or indirectly trade on the exchange.

Question 5:

What is a Treasury Bill?

Answer:

Treasury bill is the short term instrument which the Central Government issues to the financial institutions or the general public in order to meet its short term financial needs. Its maturity period cannot be more than a year. It is issued by the RBI on behalf of the government.

Question 6:

Name the document prepared in the process of online trading of securities that is legally enforceable and helps to settle disputes/claims between the investor and the broker.

Answer:

Contract note prepared in the process of online trading of securities that is legally enforceable and helps to settle disputes/claims between the investor and the broker.

This is an important document as it is legally enforceable. A unique order number is assigned to each transaction by the stock exchange and is printed on the contract note.

Question 7:

State the objective of NSE?

Answer:

NSE was set up with the following objectives:

  1. Providing a fair, efficient and transparent securities market using electronic trading system.
  2. Establishing a nationwide trading facility for all types of securities.
  3. Enabling shorter settlement cycles and book entry settlements.
  4. Meeting international benchmarks and standards.
  5. Ensuring equal access to investors all over the country through an appropriate communication network.

Question 8:

What are the objectives of SEBI?

Answer:

The objectives of SEBI are:

To regulate stock exchanges through framing of rules and regulations and code of conduct to regulate intermediaries such as brokers, bankers, underwriters, etc.

To keep a check on the activities of the brokers and other middlemen in order to regulate any unfair trade practices in the capital market.

To protect the rights and interests of investors, particularly individual investors and to guide and educate them.

To prevent trading malpractices and achieve a balance between self regulation by the securities industry and its statutory regulation.

To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers etc., with a view to making them competitive and professional.

Question 9:

What are the functions of the Stock Exchange?

Answer:

The functions of a stock exchange are:

Providing liquidity and marketability of securities – Stock exchange creates continuous market for buying and selling of securities by giving chance to investors for investing and disinvesting their securities.

Pricing of securities – Stock exchange is a mechanism of constant valuation through which the prices of the securities are determined. The share prices are determined by the forces of demand and supply.

Safety of transactions – Stock exchange ensures fair and safe deal on the market as only listed companies can trade their securities through this.

Contributes to Economic Growth – Stock exchange helps investors in investing and reinvesting their savings. This helps in channelising the savings in productive use which in turns lead to capital formation and economic growth.

Spreading of equity cult – Stock exchange ensures wider share ownership by regulating new issues, better trading practices and taking effective steps in educating the public about investment.

Question 10:

Distinguish between Capital Market and Money Market.

Answer:

Difference between Capital Market and Money Market:

BasisCapital MarketMoney Market
MeaningThe market dealing in the long term funds is known as capital market.The market dealing in short term funds is known as money market.
Amount of Investment expenditureNot huge as value of securities is lessHuge as instruments are expensive
Major ParticipantsCompanies, stock exchanges, commercial banks, financial institutions, retail investors, etcRBI, Commercial banks, non-banking finance companies, mutual funds, etc
Securities tradedEquity shares, debentures, bonds, etcTreasury bills, commercial bills commercial paper, call money, etc
SafetyRisky in terms of both capital invested & returns thereonMuch safer, since for short period & issued by banks, government etc.
Rate of interestRate of interest in this market is generally higherRate of interest is generally low

Question 11:

“Money Market is essentially a Market for short term funds.” Discuss.

Answer:

Money market is a market which deals in monetary assets whose period of maturity is up to 1 year. This makes these assets highly liquid.

Thus, money market helps in raising short term funds, for meeting temporary shortages in cash and also for temporary deployment of excess funds available, for earning returns.

Important money market instruments are:

  1. Call money
  2. Treasury Bills
  3. Commercial Papers
  4. Certificate of Deposit
  5. Commercial Bills

Question 12:

What are the functions of Financial Market?

Answer:

Functions of financial markets are:

Mobilisation of Savings: It gives savers the choice of different investments and thus helps to channelise surplus funds into the most productive use.

Facilitate Price Discovery: In the financial market, the households are suppliers of funds and business firms represent the demand. The interaction between them helps to establish a price for the financial asset which is being traded in that particular market.

Provide Liquidity to Financial Assets: Financial markets facilitate easy purchase and sale of financial assets. In doing so they provide liquidity to financial assets, so that they can be easily converted into cash whenever required.

Reduce the Cost of Transaction: Financial markets provide valuable information about securities that helps to save time, effort, and money.

Question 13:

Lalita wants to buy shares of Akbar Enterprises, through her broker kushvinder. She has a Demat Account and a bank account for cash transactions in the securities market. Discuss the subsequent steps involved in the screen-based trading for buying and selling of securities in this case.

Answer:

The following steps are involved in the screen-based trading for buying and selling of securities:

Step 1: If an investor wishes to buy or sell any security he/she has to first approach a registered broker or sub-broker and enter into an agreement with him. The investor has to sign a broker-client agreement and client registration form before placing an order to buy or sell securities.

Step 2: The investor has to open a demat account or beneficial owner account with a DP for holding and transferring securities in the demat form.

Step 3: The investor than places an order with the broker to buy or sell shares.

Step 4: The broker than will go on-line and connect to the main stock exchange board and match the share and best price avialble.

Step 5: When the shares can be bought or sold at the price mentioned. It will be communicated to the broker’s terminal and the order will be executed electronically.

Step 6: After the trade has been executed, within 24 hours the broker issues a contract note. This note contains details of the number of shares bought/sold, the price and the brokerage charges.

Step 7: Now the investor has to deliver the shares sold or pay cash for the shares bought.

Step 8: Cash is paid or securities are delivered on pay-in-day, which is before the T+2 day as the deal has to be settled and finalised.

Step 9: On the T+2 day, the exchange will deliver the share or make payment to the other broker. This is called Pay-out-day.

Step 10: The broker can make delivery of shares in demat form directly to the investor’s demat account.

Question 14:

India’s largest domestic investor life Insurance Corporation of India has once again come to government’s rescue by subscribing 70% of Hindustan Aeronautics’ ₹4,200-crore initial public offering.

a. Which market is being reflected in the above case?

b. State which method of floatation in the above identified market is being highlighted in the case? (Primary Market)

c. Explain any two other methods of floatation. (Private Placement, Offer through prospectus, offer for sale).

Answer:

a)

Primary market is being reflected in the above case. It is a market for creation and exchange of financial assets. It helps in mobilisation and channelizing the savings into most productive uses.

These markets also helps in price discovery and provide liquidity to financial assets.

b)

Right issue method of floatation is identified in this case.

This is a privilege given to existing shareholders to subscribe to a new issue of shares according to the terms and conditions of the company. The shareholders are offered the right to buy new shares in proportion to the number of shares they already possess.

c)

The other method of flotation is ‘Private Placement’.

Private placement is the allotment of securities by a company to institutional investors and some selected individuals. It helps to raise capital more quickly than a public issue.

Offer for Sale: Under this method, securities are not issued directly to the public but are offered for sale through intermediaries like issuing houses or stock brokers. In this case a company sells securities enables at an agreed price to brokers who, in turn, resell them to the investing public.

Question 15:

Explain the objectives and functions of the SEBI.

Answer:

SEBI was set up in 1988 to regulate the functions of the securities market with a view to promote their orderly and healthy development, to provide adequate protection to investors and thus, create an environment to facilitate mobilisation of adequate resources through the securities market.

Objectives of SEBI:

To regulate stock exchanges through framing of rules and regulations and code of conduct to regulate intermediaries such as brokers, bankers, underwriters, etc.

To keep a check on the activities of the brokers and other middlemen in order to regulate any unfair trade practices in the capital market.

To protect the rights and interests of investors, particularly individual investors and to guide and educate them.

To prevent trading malpractices and achieve a balance between self regulation by the securities industry and its statutory regulation.

To regulate and develop a code of conduct and fair practices by intermediaries like brokers,

merchant bankers etc., with a view to making them competitive and professional.

Functions of SEBI:

Protective Functions.

  1. To prohibit fraudulent and unfair trade practices in the securities market.
  2. To prohibit insider.
  3. To educate investors.
  4. To promote fair practices and code of conduct in the securities market.

Developmental Functions:

  1. To promote the training of intermediaries of the securities market.
  2. To develop capital markets by adopting a flexible approach.

Regulatory functions:

  1. SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries such as brokers, bankers, underwriters etc.
  2. Controlling insider trading and takeover bids.
  3. It registers the working of mutual funds.
  4. It conducts inquiries and audits of the stock exchange.
  5. Prohibition of fraudulent and unfair trade practices.

Question 16:

Explain the recent Capital Market reforms in India.

Answer:

Capital market refers to facilities and institutional arrangements through which long-term funds, both debt and equity are raised and invested. It can be divided into two parts:

  • a. Primary Market and
  • b. Secondary market.

The first stock exchange was set up in India in 1875 that was later named as Bombay Stock Exchange. After the reforms of 1991, a Stock market in India acquired three-tier systems:

  1. Regional stock exchange,
  2. national stock exchange and
  3. OTCEI.

Regional stock exchange: 

The first regional stock exchange was set up in Ahmadabad. Later on, stock exchanges were set up in Calcutta, Madras, Delhi, Hyderabad, and Indore. Currently, there are 22 regional stock exchanges.

National stock exchange:

 It started operations in 1994, with trading on the wholesale debt market segment. The NSE was set up by leading financial institutions, banks, insurance companies, and other financial intermediaries. It is managed by professionals, who do not directly or indirectly trade on the exchange.

Over the counter exchange of India: 

It was set-up to provide small and medium companies an access to the capital market for raising finance in a cost effective manner. It is defined as a place where buyers seek sellers and vice-versa and then attempt to arrange terms and conditions for purchase/sale acceptable to both the parties.

Question 17:

Explain the various Money Market instruments.

Answer:

Call Money: 

Call money is short-term finance repayable on-demand with a maturity period of one day to fifteen days, used for inter-bank transactions. It is a method by which banks borrow from each other to maintain the cash reserve ratio.

The cash reserve ratio is the minimum cash balance which banks have to maintain. The interest rate paid on call money loans is known as the call rate.

Treasury Bill: 

The Treasury bill is the short-term instrument that the Central Government issues to the financial institutions or the general public in order to meet its short-term financial needs. Its maturity period cannot be more than a year. It is issued by the RBI on behalf of the government.

Commercial Paper: 

Commercial papers are those unsecured promissory notes which are issued by reputed companies. Their buyers are banks, insurance companies, unit trusts, and firms.

The minimum face value of a commercial paper is five lakh rupees. It is used to meet the demand of a short-term seasonal need and requirement of working capital.

Certificate of Deposit: 

refers to a time deposit or fixed deposit which can be sold in the secondary market. Only a bank can issue Certificate of Deposit.

Commercial Bill: 

A commercial bill is a bill of exchange used to finance the working capital requirements of business firms.

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