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Ch 10 · Unit 10 · Part B

Financial
Markets

75 MCQs 50 Flashcards Unit 10 · Financial Markets Updated May 2026
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Chapter Overview

Chapter 10 of CBSE Class 12 Business Studies introduces students to the architecture of India's financial markets — the institutions and mechanisms through which savings are mobilised and channelled into productive investment. The chapter explains the two major segments — the Money Market, where short-term funds (up to 1 year) are exchanged through instruments like Treasury Bills, Commercial Paper, Call Money and Certificates of Deposit, and the Capital Market, where medium- and long-term funds are raised through equity shares, debentures and bonds.

Students study the Primary Market (also called the New Issue Market) where companies issue new securities for the first time through IPOs, Rights Issues, Private Placements, ESOPs, Bonus Issues and Offers for Sale, and the Secondary Market — the stock exchange (BSE, NSE) — where existing securities are bought and sold among investors. The chapter explains the trading procedure, the role of the depository system (NSDL, CDSL), Demat accounts and the modern T+1 settlement cycle.

Finally, the chapter covers SEBI — the Securities and Exchange Board of India — the regulator established in 1988 (statutory in 1992). Students learn its three function types (Protective, Developmental, Regulatory) and how it safeguards investor interests, prevents malpractices like insider trading, and develops India's securities market.

What You'll Learn
Key Concepts
Two Segments
Money Market vs Capital Market
Money market = short-term (≤1 year), low risk, mostly institutional. Capital market = medium/long-term (>1 year), higher risk, both retail + institutional.
Money Market
5 Instruments
Treasury Bills (govt), Commercial Paper (corporates), Call Money (overnight interbank), Certificate of Deposit (banks), Commercial Bills (trade).
Primary vs Secondary
New Issues vs Existing Trading
Primary = new securities issued; company gets the funds. Secondary = existing securities trade between investors on BSE/NSE; company gets nothing.
Floatation
6 Methods of Issue
IPO/FPO, Offer for Sale, Private Placement, Rights Issue, ESOP, Bonus Issue. Each suits different company size, urgency and investor profile.
Stock Exchange
BSE + NSE
Two main Indian stock exchanges. Provide liquidity, price discovery, fair-trade platform. Trade is screen-based electronic since 1995. Settlement T+1 since 2023.
Regulator
SEBI (1988/1992)
Three functions: Protective (anti-insider trading, anti-fraud), Developmental (training, education), Regulatory (registers brokers, audits exchanges).
Sample MCQs
Q1. The two segments of the financial market are:
A. Goods market and services market
B. Money market and capital market
C. Wholesale and retail market
D. Local and international market
Financial market splits into Money Market (short-term funds, ≤1 year) and Capital Market (medium/long-term funds, >1 year).
Q2. An IPO refers to:
A. Sale of shares between two existing investors
B. First-time public issue of shares by an unlisted company
C. Buyback of shares by a listed company
D. Inter-bank lending of overnight funds
IPO = Initial Public Offer — first time an unlisted company offers shares to the public. After IPO, the company is listed and shares trade on the secondary market.
Q3. SEBI's protective function is illustrated by:
A. Conducting research on stock-market trends
B. Promoting investor education campaigns
C. Prohibiting insider trading and fraudulent practices
D. Registering brokers and depositories
Protective functions safeguard investors — preventing insider trading, price rigging and fraud. Registration of brokers is regulatory; investor education is developmental.
Frequently Asked Questions
What are Financial Markets in CBSE Class 12 Business Studies?
Financial Markets are markets where financial assets like shares, debentures, bonds are created and exchanged. They connect savers (who have surplus funds) with borrowers (who need funds). The two segments are the Money Market (short-term, up to 1 year) and the Capital Market (medium- and long-term, above 1 year). Both serve key functions: mobilising savings, price discovery, providing liquidity, and reducing transaction costs.
What's the difference between Money Market and Capital Market?
Money Market deals in short-term funds with maturity up to 1 year. Instruments include Treasury Bills (government), Commercial Paper (corporates), Call Money (overnight interbank), Certificate of Deposit (banks). It's largely institutional with low risk and low return. Capital Market deals in medium- and long-term funds with maturity above 1 year. Instruments include equity shares, preference shares, debentures and bonds. It has both retail and institutional participation, with higher risk and generally higher return.
What's the difference between Primary Market and Secondary Market?
Primary Market is where new securities are issued for the first time — also called New Issue Market. Companies receive funds directly from investors. Methods include IPO, FPO, Rights Issue, Private Placement, ESOP, Bonus Issue, and Offer for Sale. Secondary Market is the stock exchange (BSE/NSE), where existing securities are traded between investors. The company doesn't get any funds in secondary trades — only the seller receives money. Both markets need each other to function.
What are the 6 methods of floatation in primary market?
(1) Public Issue (IPO/FPO) — first or further offer to the general public through a prospectus; (2) Offer for Sale (OFS) — promoters or large shareholders sell their existing shares to public; (3) Private Placement — sale to a small group of select institutional investors (mutual funds, banks); (4) Rights Issue — offered to existing shareholders in proportion to holdings; (5) ESOP — Employee Stock Option Plan, allows employees to buy at a discount; (6) Bonus Issue — free shares to existing shareholders by capitalising company reserves.
What is SEBI and what are its functions?
SEBI (Securities and Exchange Board of India) is India's securities-market regulator, set up in 1988 and given statutory powers in 1992. Its three function types: Protective — preventing insider trading, fraudulent practices, price rigging, investor education. Developmental — training intermediaries, promoting fair-trade practices, conducting research, encouraging new instruments. Regulatory — registering brokers, sub-brokers, mutual funds, depositories; laying down code of conduct; regulating stock exchanges; conducting audits.
What is dematerialisation and a Demat account?
Dematerialisation is the process of converting physical share certificates into electronic form. A Demat (dematerialised) account is an electronic account that holds securities in digital form, opened with a Depository Participant (DP) linked to a depository (NSDL or CDSL). Benefits: eliminates risks of theft, forgery, mutilation and bad delivery; enables instant transfer; cuts transaction cost; supports T+1 settlement (since 2023). Demat is mandatory for trading most listed securities in India.