12th Standard Commerce — Introduction to Financial Markets Online Test

About Introduction to Financial Markets

Easy ~40 min study

Introduction to Financial Markets is the fourth chapter of the Tamil Nadu State Board Class 12 Commerce book and opens Unit II, Financial Markets - I. It starts from a simple need: business firms and governments require large funds, and households have savings to invest. The financial market brings the two together.

The chapter first places the market inside the Indian financial system, with its organised and unorganised sectors, and then gives Brigham's definition. It classifies markets on five bases, explains how they help a nation grow, lists their intermediary and financial functions, and ends with a comparison of the new issue and secondary markets and a note on financial assets.

This page gathers the five book-back one mark questions with answers checked against the lesson, plus additional questions on every section, each with a short explanation.

What you'll learn

• State the meaning and Brigham's definition of a financial market.
• Name the components of the organised and unorganised sectors of the Indian financial system.
• Classify financial markets on five different bases with examples.
• Explain the role of the financial market in the growth of an economy.
• List the intermediary and financial functions of a financial market.
• Distinguish between the new issue market and the secondary market.

Before you start

• The meaning of shares, debentures and bank deposits.
• The idea of savings, investment and interest from Class 11 Commerce.
• Basic awareness of the stock exchange and the Government's need for funds.

Introduction to Financial Markets explained

What this chapter covers

Indian financial system

The organised sector consists of regulators, financial institutions, financial markets and financial services. The unorganised sector consists of money lenders and indigenous bankers.

Meaning and definition

A financial market is a market where financial claims, assets and securities are traded. Brigham, Eugene F defines it as the place where people and organisations wanting to borrow money are brought together with those having surplus funds.

Types of financial markets

• Type of claim: debt market and equity market
• Maturity: money market (one year or less) and capital market (more than a year)
• Time of issue: primary market and secondary market
• Timing of delivery: cash or spot market and forward or futures market
• Organisational structure: exchange traded market and over-the-counter market

Role and functions

The market mobilises savings, arranges investment and supports national, entrepreneurial and industrial growth. Its intermediary functions include transfer of resources, enhancing income, productive usage, capital formation, price determination, sale mechanism and information; its financial functions give funds to borrowers, earning assets to lenders and liquidity to the market.

New issue market and secondary market

The new issue market sells new securities once, directly, at a fixed price through underwriters and funds companies. The secondary market trades issued securities many times among investors through brokers, at prices set by demand and supply.

Common mistakes to avoid

• Calling the capital market a short term market. Claims of one year or less belong to the money market; the capital market is for more than a year.
• Placing the stock exchange in the primary market. It is the key institution of the secondary market.
• Thinking the secondary market funds companies. Only the new issue market supplies funds to companies.
• Swapping intermediaries. Underwriters serve the new issue market; brokers serve the secondary market.
• Treating the over-the-counter market as centralised. It is decentralised, outside the stock exchange, with customised procedures.

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

Frequently asked questions

What is a financial market?

A financial market is a market wherein financial instruments such as financial claims, assets and securities are traded. It channels loanable funds from suppliers who have an excess of assets to those who face a deficit of funds, and so helps firms and governments raise money while investors earn a return.

What are the components of the organised sector?

The organised sector of the Indian financial system consists of regulators, financial institutions, financial markets and financial services. The unorganised sector, by contrast, consists of money lenders, indigenous bankers and similar agencies outside formal regulation.

What is the difference between the money market and the capital market?

Both are classified on the basis of maturity. The money market deals in short term claims of usually one year or less, such as Treasury Bills, Commercial Paper and Certificates of Deposit. The capital market deals in long term claims of more than a year, such as shares and debentures.

What is a spot market?

A cash or spot market is one where the delivery of the financial instrument and the payment of cash occur immediately, so settlement is completed at once. In a forward or futures market, delivery and payment take place at a pre-determined time in the future.

How is price decided in the secondary market?

In the secondary market the price is not fixed. It fluctuates with the forces of demand and supply, as buyers and sellers interact through brokers. This price discovery process also signals how funds should be allocated in the economy.

What are the financial functions of a financial market?

A financial market provides borrowers with funds to carry out their investment plans, provides lenders with earning assets so that they earn wealth by deploying funds in productive ventures, and provides liquidity in the market so as to facilitate trading of funds.