Financial Markets Overview
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Questions and Answers

What characterizes the money market?

  • It is primarily for long-term investments.
  • It enables the raising of short-term funds. (correct)
  • It only involves equity instruments.
  • It is dominated by retail investors.

Which of the following entities is NOT a major participant in the financial market?

  • Reserve Bank of India
  • Large Corporate Houses
  • Private Equity Firms (correct)
  • Mutual Funds

What is an ideal characteristic of a capital market?

  • Finance available at reasonable cost (correct)
  • Limited access to investors
  • Lack of regulatory oversight
  • High transaction costs

How are financial markets primarily classified?

<p>By the maturity of financial instruments (B)</p> Signup and view all the answers

The primary market is crucial for which purpose?

<p>Raising new capital through the sale of securities (B)</p> Signup and view all the answers

Which of the following best describes the function of the capital market?

<p>Directs community savings into productive uses for growth (A)</p> Signup and view all the answers

What types of instruments are involved in the capital market?

<p>Both debt and equity instruments (C)</p> Signup and view all the answers

Which group is involved in the capital market structure?

<p>Development banks (B)</p> Signup and view all the answers

What must an investor open to facilitate cash transactions in the securities market?

<p>A bank account (C)</p> Signup and view all the answers

Which of the following regulates Demat Participants (DPs) in the securities market?

<p>Securities and Exchange Board of India (SEBI) (A)</p> Signup and view all the answers

What is the primary function of a Demat Participant (DP)?

<p>To hold and transfer securities in demat form (C)</p> Signup and view all the answers

What does an investor need to do before making a purchase or sale in the securities market?

<p>Place an order with the broker (B)</p> Signup and view all the answers

Which two entities are mentioned as providing facilities for holding and transferring securities?

<p>NDSL and CDSL (D)</p> Signup and view all the answers

What is the purpose of having a Trading Terminal?

<p>To transact, track, and mark market moves (D)</p> Signup and view all the answers

What type of account must an investor have to access securities in demat form?

<p>Demat account (C)</p> Signup and view all the answers

Who does an investor typically place their orders with to buy or sell shares?

<p>A broker (D)</p> Signup and view all the answers

What is the primary function of a stock exchange?

<p>To provide a platform for buying and selling existing securities (C)</p> Signup and view all the answers

How do stock exchanges enhance the credit worthiness of companies?

<p>By providing a platform for liquidity and marketability (A)</p> Signup and view all the answers

Which of the following is NOT a benefit of an active and healthy secondary market?

<p>Promotion of regulatory non-compliance (A)</p> Signup and view all the answers

What role does information technology play in stock exchanges?

<p>It simplifies the process of trading through stock exchanges (D)</p> Signup and view all the answers

What primarily determines the share prices on a stock exchange?

<p>Forces of demand and supply (D)</p> Signup and view all the answers

According to the Securities Contracts (Regulation) Act 1956, what does a stock exchange provide?

<p>A venue for trading existing securities (A)</p> Signup and view all the answers

What does liquidity in a stock exchange refer to?

<p>The ease with which existing securities can be bought or sold (C)</p> Signup and view all the answers

Which statement best describes the role of a stock exchange in providing information?

<p>It provides instant information to both buyers and sellers. (A)</p> Signup and view all the answers

What ensures that the investing public gets a safe transaction in the stock market?

<p>Strong regulation of the exchange's membership (C)</p> Signup and view all the answers

What impact does the primary market's growth have on the secondary market?

<p>It fosters a more active secondary market (A)</p> Signup and view all the answers

What does the term 'disinvestment' mean in the context of stock exchanges?

<p>The selling off of existing securities (D)</p> Signup and view all the answers

How does a stock exchange contribute to economic growth?

<p>By facilitating the resale and trading of existing securities (C)</p> Signup and view all the answers

What has replaced the open outcry system in most stock exchanges?

<p>Automated trading systems (A)</p> Signup and view all the answers

Which of the following is NOT a function of a stock exchange?

<p>Facilitating long-term investments exclusively (C)</p> Signup and view all the answers

What makes the membership of a stock exchange essential?

<p>It ensures regulated and legal dealings. (A)</p> Signup and view all the answers

What is a key characteristic of electronic stock exchanges compared to traditional exchanges?

<p>They offer more transparency in price setting. (A)</p> Signup and view all the answers

What is the primary benefit of book entry mode for investors?

<p>It increases transaction speed and efficiency. (A)</p> Signup and view all the answers

Which of the following is the first depository operational in India?

<p>National Securities Depositories Limited (NSDL) (B)</p> Signup and view all the answers

Who promoted the Central Depository Services Limited (CDSL)?

<p>Bombay Stock Exchange and the Bank of India (C)</p> Signup and view all the answers

What role do depository participants (DPs) serve in the depository system?

<p>They act as intermediaries between investors and the depositories. (C)</p> Signup and view all the answers

What contributed to the establishment of SEBI?

<p>The growth of the capital market and increasing investment malpractices. (A)</p> Signup and view all the answers

During which decade did the capital market experience significant growth leading to the need for SEBI?

<p>1980s (A)</p> Signup and view all the answers

Which group was NOT mentioned as a contributor to market malpractices in the content provided?

<p>Insurance companies (C)</p> Signup and view all the answers

What primary function do the intermediaries serve in the depository framework?

<p>To serve as communication links between investors and depositories. (C)</p> Signup and view all the answers

What is a primary market primarily used for?

<p>Issuing new securities (C)</p> Signup and view all the answers

Which regulatory body oversees security market operations in India?

<p>Securities and Exchange Board of India (D)</p> Signup and view all the answers

Which of the following is a function of the stock exchange?

<p>Platform for buying and selling securities (C)</p> Signup and view all the answers

What is often called a Treasury Bill?

<p>Short-term government security (A)</p> Signup and view all the answers

What document is crucial for resolving disputes between investors and brokers?

<p>Contractual Agreement (C)</p> Signup and view all the answers

Which of the following defines the capital market?

<p>A market for long-term financial securities (A)</p> Signup and view all the answers

What is the common name for a Beneficiary Owner Account?

<p>Demat Account (B)</p> Signup and view all the answers

Which method of floatation does an initial public offering (IPO) typically involve?

<p>Public offer (C)</p> Signup and view all the answers

Flashcards

What is a financial market?

A platform where buyers and sellers of financial instruments meet to fulfill their financial needs.

What is the Money Market?

Financial instruments with a maturity of less than a year, used for short-term funding or lending.

What is the Capital Market?

Financial instruments with a maturity of more than a year, used for long-term investments.

What is the Primary Market?

The part of the capital market where new securities are first issued.

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What is the Secondary Market?

The part of the capital market where previously issued securities are traded.

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What are Debt instruments?

Financial instruments that represent debt, like bonds, where the issuer promises to repay the principal and interest.

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What are Equity instruments?

Financial instruments that represent ownership in a company, like stocks, giving the holder a share in the company's profits.

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Who are the major participants in the financial market?

The Reserve Bank of India (RBI), Commercial Banks, Non-Banking Finance Companies, State Governments, Large Corporate Houses, and Mutual Funds.

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Stock Exchange

A market where existing securities are bought and sold, facilitating investment and disinvestment.

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Pricing of Securities

The process of determining the value of a security based on demand and supply.

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Safety of Transaction

Ensuring that transactions on the stock exchange are conducted fairly and safely, protecting investors.

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Contributes to Economic Growth

The stock exchange allows companies to raise capital by selling shares, which fuels economic growth.

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What is a stock exchange?

A group of individuals, either incorporated or not, whose purpose is to assist, regulate, or control buying and selling of securities.

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How are prices determined?

Stock prices on an exchange are determined by the balance between the number of people wanting to buy and sell.

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What information does a stock exchange provide?

The stock exchange plays a crucial role in providing up-to-date information on security valuations.

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Electronic Trading

The process of trading securities through brokers using a computer system.

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What is liquidity in a stock exchange?

The ability to easily buy or sell a security without significant price impacts. A stock exchange provides a platform for investors to quickly convert their investments into cash.

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Why is a healthy secondary market important?

A healthy secondary market provides a more stable and attractive environment for investing. It encourages more trade and makes the primary market more appealing to companies.

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How does a stock exchange ensure safety of investments?

A stock exchange offers a safe and trustworthy place for investors to trade securities, reducing risk associated with fraud or unreliable trading.

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How do stock exchanges help companies raise finance?

Stock exchanges provide a platform for companies to raise funds by selling shares or bonds to the public. They help companies grow and expand.

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How do stock exchanges improve company creditworthiness?

Stock exchanges play a crucial role in enhancing the creditworthiness of individual companies by providing transparency and a platform for investors to assess and trust companies.

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Book Entry Mode

A system where securities are recorded electronically, allowing for faster and more efficient transactions.

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Depository

A central organization responsible for the electronic holding and transfer of securities.

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National Securities Depositories Limited (NSDL)

The first and largest depository in India, established as a joint venture of IDBI, UTI, and the National Stock Exchange.

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Central Depository Services Limited (CDSL)

The second depository in India, established by the Bombay Stock Exchange and the Bank of India.

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Depository Participant (DP)

An intermediary between the depositories and investors, providing services like opening accounts, holding securities, and facilitating transactions.

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Growth of the Capital Market in the 1980s

The period during the 1980s saw a rapid increase in the number of investors participating in the capital market.

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Malpractices in the Securities Market

The expansion of the investor population and market capital led to unethical practices by various market participants.

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Establishment of SEBI

The Securities and Exchange Board of India (SEBI) was established to regulate the securities market and protect investor interests.

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What is a Depository Participant (DP)?

A depository participant (DP) acts as an intermediary between investors and the depository system, holding and transferring securities in dematerialized form. They are crucial for facilitating trading in the securities market.

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What are NSDL and CDSL?

The National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) are the two main depositories in India, responsible for managing and maintaining the dematerialized form of securities.

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Why is a bank account crucial for securities trading?

To participate in the securities market, investors must have a bank account specifically for cash transactions related to securities trading. This bank account facilitates the flow of money for buying and selling shares.

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How does the order process begin in the securities market?

The process of initiating a trade in the securities market starts with an investor placing an order with their broker. This order specifies whether the investor wants to buy or sell shares.

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What role does a broker play in the securities market?

A broker acts as an intermediary, facilitating the execution of buy or sell orders placed by investors. They connect investors with the stock exchange and ensure the trades are carried out efficiently.

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What is the role of SEBI in the securities market?

The Securities and Exchange Board of India (SEBI) plays a vital role in regulating the securities market. It establishes rules and standards for market participants, ensuring fairness and transparency.

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What is a trading terminal?

A trading terminal is a software platform that allows investors to access the securities market, view real-time quotes, place orders, and perform other trading operations.

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Describe the process of trading in the securities market.

The process of trading in the securities market involves the following steps: (1) Opening a Demat account and bank account, (2) Placing an order with a broker, (3) Executing the order, (4) Tracking the order's progress, and (5) Monitoring the market's movement.

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What is a Treasury Bill?

A short-term debt instrument issued by the government with maturities ranging from 91 days to 364 days.

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What are the segments of NSE?

The National Stock Exchange (NSE) is divided into segments based on the type of securities traded. These segments include Equity, Debt, Derivative, and Currency markets.

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Why is the stock market considered safe and fair?

The stock market offers safety and fairness due to the role of the Stock Exchange. It ensures transparency, fair trading practices, and efficient information dissemination.

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What is a Demat account?

A Beneficiary Owner Account is a special account opened by investors for trading securities. It is commonly called a Demat account.

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What details do investors provide to brokers?

While filling a client registration form, investors need to provide their personal details like name, address, and financial information to the broker.

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What are the functions of Financial Markets?

Financial markets facilitate the transfer of funds from those with surplus funds to those with a shortage, allowing for financial intermediation and economic growth.

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Study Notes

Financial Markets

  • Financial markets are the mechanisms for channeling funds from savers to investors.
  • This allocative function helps ensure resources are directed to their most productive use, resulting in higher returns for savers and economic growth.

SENSEX

  • SENSEX is the benchmark index of the Bombay Stock Exchange (BSE).
  • It's a crucial indicator of the Indian stock market's health.
  • The index tracks the prices of 30 actively traded stocks representing 13 economic sectors.
  • A rising SENSEX suggests investors anticipate increased company earnings and a healthy Indian economy.

Types of Financial Markets

  • Money Market: Short-term debt instruments (maturity less than a year) are traded. These include treasury bills, commercial papers, call money, and certificates of deposit.
  • Capital Market: Long-term debt and equity instruments (maturity longer than a year) are traded. This includes stocks and bonds, used by businesses to raise capital for long-term projects. Further divided into primary and secondary markets.
  • Primary Market: Where companies issue new securities (like stocks or bonds) for the first time. Investors purchase these initial offerings. Raises capital for firms.
  • Secondary Market: Existing securities are traded between investors. Provides liquidity and marketability for the instruments.

Stock Exchanges

  • Facilitate buying and selling of securities.
  • Provide a central platform for the exchange of securities between investors.
  • Vital for efficient allocation of capital and contribute to the overall economy.
  • The functioning of stock exchanges is regulated to maintain standards and protect investors.

SEBI

  • SEBI (Securities and Exchange Board of India) is the regulatory body in India for the securities market.
  • It aims to protect investor interests, and ensure fair, transparent, and orderly market functioning.
  • SEBI performs tasks including registration of market participants, developing fair practices, and prohibiting fraudulent activities.

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Description

This quiz covers the fundamental concepts of financial markets, including the mechanisms that channel funds from savers to investors. It also provides an insight into the SENSEX as a crucial indicator of the Indian stock market, and distinguishes between money and capital markets with their respective features.

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