12th Standard Commerce — Capital Market Online Test

About Capital Market

Medium ~45 min study

Capital Market is the fifth chapter of the Tamil Nadu State Board Class 12 Commerce book and the first lesson of Unit 2, Financial Markets. It opens with Thirukkural 449 on the need for capital and explains how the savings of the community are channelled into industry through long-term debt and equity.

The lesson defines the capital market, lists its characteristics, divides it into the primary (new issue) market and the secondary market, and explains its role in capital formation and economic growth. It then traces the Indian capital market from 1947 and describes the new financial institutions, followed by boxes on the foreign exchange, commodity, derivatives and gilt-edged markets.

This page gives the printed one mark questions of the 12th Commerce book exercise with answers checked against the lesson, plus additional MCQs on every section, each with a short explanation.

What you'll learn

• Define the capital market and quote Arun K. Datta's definition.
• List the five characteristics of a capital market.
• Distinguish the primary market from the secondary market and name the three ways of raising capital in the primary market.
• Explain the functions and importance of the capital market in economic development.
• Trace the evolution and growth of the Indian capital market since 1947.
• Describe new financial institutions such as venture funds, mutual funds, factoring, OTCEI, NSEI, NSDL and SHCIL.

Before you start

• The meaning of financial market and its classification from Chapter 4.
• Basic ideas of shares, debentures and stock exchanges from Class 11 Commerce.
• The difference between short-term and long-term finance.

Capital Market explained

What this lesson covers

Meaning and definition

The capital market is a market for borrowing and lending of long-term capital funds required by business enterprises. Arun K. Datta defined it as a complex of institutions, investment and practices linking the demand for and supply of different types of capital.

Characteristics

• Securities market dealing in shares and debentures
• Price set by demand and supply
• Participants: individuals, corporates, Government, banks and financial institutions
• Not confined to specific locations
• Market for long-term financial assets

Kinds of capital market

The primary or New Issue Market raises funds through public issue, rights issue and private placement. The secondary market trades old securities on the stock exchange and the over-the-counter market.

Functions

Savings and capital formation, permanent capital, industrial growth, a ready and continuous market, a reliable guide to performance, proper channelization of funds, a variety of services, development of backward areas, foreign capital and easy liquidity.

Evolution and new institutions

1947 to 1973 built the infrastructure (IFCI, ICICI, IDBI, UTI, SFCs, SIDCs); 1980 to 1992 saw debentures and public sector bonds; SEBI became the regulator. New institutions include venture funds, mutual funds, factoring, OTCEI, NSEI (1992), NCDS, NSDL (1996) and SHCIL.

Common mistakes to avoid

• Saying the capital market provides short-term funds. Short-term funds belong to the money market.
• Calling the secondary market the New Issue Market. The primary market is the New Issue Market.
• Mixing up rights issue and private placement. Rights go first to existing shareholders; private placement is to a small group of investors.
• Giving 1996 for NSEI. NSEI was established in 1992; NSDL was set up in 1996.
• Classing coffee or sugar as hard commodities. They are soft commodities; gold, oil and iron ore are hard.

Test yourself on these with the practice test, then check the worked reasoning in the solved MCQs.

Frequently asked questions

What is a capital market?

A capital market is a market where buyers and sellers trade financial securities such as bonds and stocks. It is defined as a market for borrowing and lending of long-term capital funds required by business enterprises, and it consists of development banks, commercial banks and stock exchanges.

What are the characteristics of a capital market?

It is a securities market dealing in shares and debentures; prices are set by demand and supply; its participants include individuals, corporates, Government, banks and financial institutions; it is not confined to specific locations; and it provides a transaction platform for long-term financial assets.

What are the ways of raising capital in the primary market?

A company may raise capital in the primary market in three ways: a public issue, which sells securities to the public; a rights issue, which first offers securities to existing shareholders on a pre-emptive basis; and private placement, which sells securities privately to a small group of investors.

How does the capital market help economic development?

It mobilises savings for capital formation, lets companies raise permanent capital, stimulates industrial growth, offers a ready and continuous market, guides investors by performance, channels funds properly, provides varied services, develops backward areas, brings in foreign capital and gives easy liquidity.

What is OTCEI?

The Over the Counter Exchange of India was set up by a premier financial institution to allow trading of securities across electronic counters throughout the country. It addresses problems of investors and medium-size companies, and its strengths are transparency, quick deals, faster settlements and better liquidity.

What are factoring and venture capital institutions?

Factoring is an arrangement in which a financial institution provides finance on the basis of assignment or sale of account receivables and collects book debts for its clients. Venture capital financing is equity financing designed for new and innovative project ideas and high-technology projects.

What do NSDL and SHCIL do?

NSDL, set up in 1996, achieves time-bound dematerialization and rematerialization of shares and eases post-trade problems in the secondary market. SHCIL serves as a central securities depository for stock exchange transactions and administers clearing functions at a national level.