CBSE Class 12 Business Studies (2026–27)
Chapter 10: Financial Markets
20 Important Questions and Answers
Financial Markets help in mobilising savings, providing liquidity, facilitating price discovery, and allocating funds efficiently. Important topics include money market, capital market, stock exchanges, NSE, OTCEI, SEBI, and trading procedures.
1. What is a Financial Market?
Answer:
A Financial Market is a mechanism through which people and institutions having surplus funds transfer them to those who require funds. It acts as a link between investors and borrowers. Financial markets facilitate the buying and selling of financial assets such as shares, debentures, bonds, and treasury bills. They help in the efficient allocation of resources, encourage savings and investments, and contribute to economic development. By providing liquidity and reducing transaction costs, financial markets ensure smooth functioning of the financial system and support industrial and commercial growth in the economy.
2. State any two functions of a Financial Market.
Answer:
Financial markets perform several important functions. First, they mobilise savings by collecting funds from individuals and institutions and channelising them into productive investments. Second, they facilitate price discovery through the interaction of buyers and sellers. Financial markets also provide liquidity by enabling investors to convert securities into cash easily. Another function is reducing transaction costs by providing valuable information regarding prices and availability of financial assets. These functions promote efficient utilisation of resources and support economic growth and development in the country.
3. What is a Money Market?
Answer:
A Money Market is a segment of the financial market that deals with short-term funds and monetary instruments having a maturity period of up to one year. It helps businesses, banks, and governments meet their short-term financial requirements. The money market is highly liquid and provides quick access to funds. Major participants include commercial banks, the RBI, financial institutions, and large corporations. Common instruments traded in the money market are Treasury Bills, Commercial Papers, Certificates of Deposit, Commercial Bills, and Call Money. It plays a vital role in maintaining liquidity in the economy.
4. What is Capital Market?
Answer:
The Capital Market is a market for medium-term and long-term funds. It facilitates the raising of capital by companies and governments for investment purposes. Capital markets deal in securities such as shares, debentures, bonds, and other long-term financial instruments. It consists of two parts: the Primary Market and the Secondary Market. Investors can earn returns through dividends, interest, and capital appreciation. Capital markets contribute significantly to economic growth by providing long-term resources for industrial expansion and infrastructure development. They also encourage investment and capital formation in the economy.
5. Differentiate between Money Market and Capital Market.
Answer:
Money Market deals with short-term funds having a maturity period of less than one year, whereas Capital Market deals with medium and long-term funds. Money market instruments include Treasury Bills, Commercial Papers, and Call Money, while capital market instruments include shares, debentures, and bonds. The money market provides high liquidity and lower returns, whereas the capital market generally offers higher returns with comparatively greater risk. Participants in the money market are mainly banks and financial institutions, while capital markets involve companies, investors, brokers, and stock exchanges.
6. What is a Treasury Bill?
Answer:
A Treasury Bill (T-Bill) is a short-term money market instrument issued by the Reserve Bank of India on behalf of the Government of India. It is used to meet short-term financial requirements of the government. Treasury Bills are considered one of the safest investments because they carry government backing. They are issued at a discount and redeemed at face value upon maturity. Their maturity periods generally range from 14 days to 364 days. Investors earn profits through the difference between the purchase price and redemption value.
7. What is Commercial Paper?
Answer:
Commercial Paper (CP) is an unsecured short-term promissory note issued by large and creditworthy companies to raise funds for short-term financial needs. It is issued at a discount and redeemed at face value upon maturity. The maturity period generally ranges from 15 days to one year. Commercial Papers provide companies with a cost-effective source of finance and offer investors better returns than traditional bank deposits. Since they are unsecured, only financially sound companies with a good credit rating can issue Commercial Papers.
8. What is a Certificate of Deposit?
Answer:
A Certificate of Deposit (CD) is a negotiable short-term money market instrument issued by commercial banks and financial institutions. It is issued against funds deposited with the bank for a specified period. Certificates of Deposit generally offer a fixed rate of return and can be traded in the secondary market. They provide investors with a safe and attractive investment option while helping banks raise funds. CDs are popular among institutional investors because they offer higher returns compared to ordinary savings accounts and fixed deposits.
9. What is a Primary Market?
Answer:
The Primary Market is the market where new securities are issued for the first time. Companies raise fresh capital from investors through this market by issuing shares and debentures. It enables businesses to obtain funds for expansion, diversification, and modernization projects. Securities can be issued through methods such as public issues, rights issues, offer for sale, private placement, and e-IPOs. Investors purchase securities directly from the issuing company in the primary market. Therefore, it plays a crucial role in capital formation and economic development.
10. What is a Secondary Market?
Answer:
The Secondary Market is the market where existing securities are bought and sold among investors after their original issue. It is commonly known as the stock exchange market. Companies do not receive any additional funds through transactions in the secondary market. Instead, it provides liquidity and marketability to securities. Investors can easily convert their investments into cash whenever required. The secondary market also helps in price discovery and investor protection through regulated trading practices. It encourages investment by offering an exit route to investors.
11. What is a Stock Exchange?
Answer:
A Stock Exchange is an organised market where securities such as shares, debentures, and bonds are bought and sold. It provides a platform for investors and companies to trade securities in a transparent and regulated manner. Stock exchanges ensure fair dealings, liquidity, and price determination. They also promote investment by providing investors with confidence and safety. Major stock exchanges in India include the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Stock exchanges play a significant role in capital formation and economic growth.
12. State any two functions of a Stock Exchange.
Answer:
One important function of a stock exchange is providing liquidity to investors by allowing them to buy and sell securities easily. Another function is facilitating price discovery through continuous interaction between buyers and sellers. Stock exchanges also ensure safety in transactions through strict regulations and promote investment habits among the public. They provide valuable information regarding market trends and prices, helping investors make informed decisions. Thus, stock exchanges contribute to the efficient functioning of the capital market and economic development.
13. What is NSE?
Answer:
The National Stock Exchange (NSE) is India’s leading stock exchange established in 1992. It introduced a fully automated screen-based trading system, making trading transparent, efficient, and accessible across the country. NSE provides nationwide access to investors and promotes fair and efficient trading practices. Its benchmark index, Nifty 50, reflects the performance of major companies listed on the exchange. NSE has played a significant role in modernising the Indian capital market by improving transparency, reducing settlement risks, and increasing investor confidence.
14. What is OTCEI?
Answer:
OTCEI stands for Over The Counter Exchange of India. It was established to provide an alternative trading platform, especially for small and medium-sized companies. OTCEI enables electronic trading without a traditional trading floor and allows companies with lower capital requirements to access the capital market. It promotes transparency, efficiency, and investor participation. OTCEI was inspired by the NASDAQ model and aimed to facilitate easier listing and trading of securities. It helped expand the reach of capital markets to emerging enterprises.
15. What is SEBI?
Answer:
SEBI, or the Securities and Exchange Board of India, is the regulatory authority for the securities market in India. It was established in 1988 and given statutory status in 1992. SEBI protects the interests of investors, regulates stock exchanges and market intermediaries, and promotes the development of the securities market. It ensures transparency, fairness, and efficiency in market operations. Through various rules and regulations, SEBI helps prevent fraudulent practices and enhances investor confidence in the financial market system.
16. State any two protective functions of SEBI.
Answer:
SEBI performs several protective functions to safeguard investors. One protective function is preventing insider trading, where individuals use confidential information for personal gains. Another function is prohibiting fraudulent and unfair trade practices in the securities market. SEBI also educates investors, promotes transparency, and ensures that companies provide accurate information to the public. These measures protect investors from exploitation and build trust in the securities market. By maintaining fairness and integrity, SEBI contributes to the healthy growth of the financial system.
17. State any two developmental functions of SEBI.
Answer:
SEBI performs developmental functions to promote and improve the securities market. One developmental function is training intermediaries such as brokers and market participants to enhance professional standards. Another function is encouraging innovation and technological advancement in trading systems. SEBI also conducts investor awareness programmes and promotes research in the securities market. These initiatives help improve market efficiency, transparency, and accessibility. Developmental functions strengthen the capital market and support the overall growth of the economy by encouraging greater investor participation.
18. What is Dematerialisation?
Answer:
Dematerialisation is the process of converting physical share certificates and securities into electronic form. The securities are held in a Demat Account maintained with a depository participant. Dematerialisation eliminates risks associated with physical certificates such as loss, theft, forgery, and damage. It facilitates faster and safer transfer of securities and reduces paperwork. Investors can buy, sell, and hold securities conveniently in electronic form. The introduction of dematerialisation has increased efficiency and transparency in the securities market and simplified trading procedures.
19. What is a Demat Account?
Answer:
A Demat Account is an account used to hold securities in electronic form. It functions similarly to a bank account, but instead of money, it stores shares, bonds, mutual funds, and other securities. Investors need a Demat Account to trade in the stock market. It provides safety, convenience, and easy access to investment holdings. Transactions can be completed electronically, reducing paperwork and processing time. Demat Accounts have become an essential requirement for investing in modern financial markets and ensure smooth settlement of trades.
20. Explain the trading procedure in a stock exchange.
Answer:
The trading procedure begins with opening a Demat and Trading Account through a registered broker. Investors place buy or sell orders, which are executed electronically through the stock exchange. Once the order is matched, the transaction is confirmed. The securities are transferred to the buyer’s Demat Account, and payment is made to the seller through the settlement process. Modern stock exchanges follow an electronic settlement system, ensuring speed, transparency, and security. This process enables efficient trading and reduces risks associated with manual transactions.