TN State Board Kalvi 12th Commerce Notes Chapter 4 Introduction to Financial Markets
Question 1.
What are the components of organized sectors?
Answer:
- Regulations
- Financial Institutions
- Financial Markets
- Financial Services
Question 2.
Write a note on financial market.
Answer:
A market where in financial instruments such as financial claims, assets and securities are traded is known as a “Financial Market”. [OR]
A financial market is an institution or arrangement that facilitates the exchange of financial instruments (equity shares, preference shares, debentures corporate stocks and bonds).
Question 3.
What is equity market?
Answer:
- It is the type of financial market on the basis of financial claim.
- It is a market for trading in Equity Shares of companies.
Question 4.
What is debt market?
Answer:
- It is type of financial market on the basis of financial claim.
- A market for trading in Debt Instrument. That is Government Bonds or Securities, Corporate Debentures or Bonds.
Question 5.
How is prize decided in a secondary market?
Answer:
Price will be decided in a secondary market based on the interaction of buyers and sellers. It fluctuates depends on the demand and supply force in the market.
Question 6.
Give the meaning and definition of financial market.
Answer:
Meaning:
A market where in financial instruments such as financial claims, assets and securities are traded is known as a “Financial Market”.
A Financial Market is an institution or arrangement that facilitates the exchange of financial instruments such as equity shares, preference shares, debentures corporate stocks and bonds. ‘
Definitions:
According to Brigham, Eugene F, “The place where people and organizations wanting to borrow money are bought together with those having surplus funds is called a financial market.
Question 7.
Differentiate Spot Market from Futures Market.
Answer:
Spot Market:
It is a market where the delivery of the financial instrument and payment of cash occurs immediately.
Forward or Futures Market: It is a market where the delivery of assets and payment of cash takes place at a pre-determined time (Future).
Question 8.
Write a note on Secondary Market.
Answer:
- It is the market for securities that are already issued or the place where formerly issued securities are traded is known as Secondary Market.
- Securities can be sold multiple times.
- Price will be fluctuates and it will depends on the demand and supply force in one market.
- Stock Exchange is an important institution in the secondary market.
Question 9.
Bring out the scope of financial market in India.
Answer:
- The Financial Market provides financial assistance to individuals, agricultural sectors, industrial sectors.
- It is also provide financial assistance to financial institutions like banks, insurance sectors, Provident Funds and the Government.
- The institutions get their short term as well as long term financial assistance through financial market.
- Individuals, institutions and the Government can get their required funds in time.
- It leads to the overall economic development.
Question 10.
Distinguish between new issue market and secondary market.
Answer:
Question 11.
Enumerate the different kinds of financial markets.
Answer:
Financial markets can be classified in different ways.
Stock Market:
The stock market trades shares of ownership of public companies. Each shares comes with a price and investors make money with the stock when they perform well in the market.
Bond Market:
The Bond Market offers opportunities for companies and the Government to secure money to finance a project or investment. Investors buy bonds from a company. The company returns the amount of the bonds within an agreed period plus interest.
Commodity Market:
The Commodity market is where traders and investors buy and sell natural resources or commodities such as com, oil, meat and gold. A specific market is created for such resources because their price is unpredictable.
Derivatives Market:
Such a market involves derivatives or contracts whose value is based on the market value of the asset being traded.
Question 12.
Discuss the role of financial market.
Answer:
A financial market is of great use for a country as it helps the economy in the following manner.
(i) Savings Mobilization:
Obtaining funds from the savers or surplus units. (Business firms, Public Sector Units household individuals and the Government).
(ii) Investment:
Financial Market plays a key role in arranging the investment of funds to collected funds from those units which are in need of the same.
(iii) National Growth:
To attain national growth by ensuring the flow of surplus funds to deficit units. Flow of funds for productive purposes is also made possible.
(iv) Entrepreneurship Growth:
Financial markets contribute to the development of entrepreneurial class for arranging available necessary financial resources.
(v) Industrial Development:
The different components of financial markets help an accelerated growth industrial development. It leads to overall economic development of a country.
Question 13.
What are the functions of Financial Markets?
Answer:
Intermediary Functions:
(i) Transfer of Resources:
To transfer of real economic resource from lenders to ultimate borrowers.
(ii) Enhancing Income:
Financial Markets allow lenders to earn interest/ dividend on their surplus investible funds.
(iii) Productive Usage:
Financial Markets allow to use the funds borrowed and enhancing the income and the gross national production.
(iv) Capital formation:
Financial markets provide a channel to save funds. New saving funds flow to aid capital formation of a country.
(v) Price Determination:
Interaction of Buyers and Sellers to determine the price of the traded financial assets. Allocation of funds in the economy based on demand and supply (price mechanism).
(vi) In Sale Mechanism:
For selling of a financial assets by an investor to offer the benefit of marketability and liquidity of such assets.
(vii) Information:
To know the various segments of the markets so as to reduce the cost of transaction of financial assets.
Financial Functions:
(i) Providing the borrowers with funds so as to enable them to carry out the investment plan.
(ii) Providing liquidity in the market so as to facilitate trading of funds.
Question 14.
Discuss the various types of Financial markets.
Answer:
Financial Markets can be classified in different ways. They are as follows.
(a) On the basis of Type of Financial claim:
(i) Debt Market: Trading in Debt Instrument, Government Bonds or Securities Corporate Debentures or Bonds.
(ii) Equity Market: It is the financial market for trading in equity shares of companies.
(b) On the basis of Maturity of Financial Claim:
(i) Money Market: It is the market for short term financial claim (one year or less). Eg: Treasury Bills, Commercial Paper
(ii) Capital Market: Market for long term financial claim (More than a year). Eg: Shares, Debentures
(c) On the basis of Time of Issue of Financial Claim:
(i) Primary Market: Sale of securities for the first time by the issuers (companies). The money from investors goes directly to the issuers.
(ii) Secondary Market: The market for securities that are already issued. (Stock Exchange) Securities can be sold by multiple times in the market.
(d) On the basis of Timing of Delivery of Financial Claim:
(i) Cash / Spot Market: A market where the delivery of financial instrument and payment of cash occurs immediately.
(ii) Forward or Future Market: A market where the delivery of assets and payment of cash take place at a pre-determined time (Future).
(e) On the basis of the Organizational Structure of the Financial Market:
(i) Exchange Traded Market: It is a centralized organization with standardized procedures (Stock Exchange).
(ii) Over-the-counter Market: It is a decentralized market with customized procedures (Outside the Stock Exchange).
Choose the correct answer:
Question 1.
Financial market facilitates business firms:
(a) To rise funds
(b) To recruit workers
(c) To make more sales
(d) To minimize fund requirement
Answer:
(a) To rise funds
Question 2.
Capital market is a market for:
(a) Short Term Finance
(b) Medium Term Finance
(c) Long Term Finance
(d) Both Short Term and Medium Term Finance
Answer:
(c) Long Term Finance
Question 3.
Primary market is also called as:
(a) Secondary market
(b) Money market
(c) New Issue Market
(d) Indirect Market
Answer:
(c) New Issue Market
Question 4.
Spot Market is a market where the delivery of the financial instrument and payment of cash occurs:
(a) Immediately
(b) In the future
(c) Uncertain
(d) After one month
Answer:
(a) Immediately
Question 5.
How many times a security can be sold in a secondary market?
(a) Only one time
(b) Two time
(c) Three times
(d) Multiple times
Answer:
(d) Multiple times