CBSE Class 12 Business Studies Chapter 10: Financial Market NCERT Solutions

Reviewed by NCERT Help Editorial Team · Updated on 29 Jul 2026

NCERT Solutions PDF Class 12 PDF

This resource provides detailed NCERT Solutions for Class 12 Business Studies, Chapter 10, focusing on the Financial Market. It covers the fundamental role of financial markets in connecting surplus and deficit economic units, acting as a bridge between lenders and borrowers. The solutions explain the key functions of financial markets, including mobilizing savings, facilitating price discovery, providing liquidity, and reducing transaction costs. It elaborates on the two main segments: the Money Market for short-term funds and the Capital Market for medium and long-term funds. The solutions also detail the features and instruments of the money market, and the types of capital markets (primary and secondary), including methods of floatation like public issues and private placements. Furthermore, it explains the concept of a stock exchange, its operators, functions, and the trading procedure. Finally, it highlights the benefits of online trading and discusses major Indian stock exchanges like NSEI and OTCEI. These solutions are designed to help students grasp complex concepts and prepare effectively for their examinations.

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Quick info

Board	CBSE
Class	Class 12
Subject	Business Studies
Session	2026
Language	English
Type	NCERT Solutions
Chapter	10. Financial Market (Revision Notes)

Chapter summary

NCERT Solutions for Class 12 Business Studies Chapter 10, 'Financial Market', offer a clear explanation of how financial markets function. The solutions cover the definition and crucial functions of financial markets, differentiating between the Money Market and the Capital Market. Key aspects like money market instruments, capital market features, and the distinction between primary and secondary markets are detailed. The chapter also explains the role and operations of a stock exchange, its participants, and its contribution to economic growth. This chapter's solutions are vital for understanding the mechanisms of fund flow in an economy.

Learning outcomes

Understand the definition and primary functions of a financial market.
Differentiate between the Money Market and the Capital Market.
Identify and explain various instruments of the Money Market.
Explain the features and types of Capital Markets, including Primary and Secondary Markets.
Describe the role, operators, and functions of a Stock Exchange.
Outline the trading procedure on a Stock Exchange.

Topics covered

Paper topics

Financial Market Definition
Functions of Financial Markets
Classification of Financial Markets
Money Market
Money Market Instruments
Capital Market
Primary Market
Methods of Floatation
Secondary Market
Stock Exchange
Operators in Stock Exchange
Functions of Stock Exchange

Important topics

Functions of Financial Markets
Money Market vs. Capital Market
Primary Market vs. Secondary Market
Instruments of Money Market
Functions of Stock Exchange

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Questions and Solutions

1. What is a Financial Market?

Financial Market is a link between surplus and deficit units or in other words financial market brings together lenders and borrowers.

Solution: A Financial Market serves as a crucial intermediary mechanism that connects economic agents who have surplus funds with those who have a deficit of funds. Essentially, it acts as a platform where lenders (savers) and borrowers (investors) can interact. This interaction allows for the efficient flow of capital from those who have it to those who need it for investment or consumption, thereby playing a vital role in economic activity.

2. What are the Functions of Financial Markets?

Functions of Financial Markets

Solution: Financial markets perform several essential functions that contribute to the smooth functioning of an economy:

Mobilisation of savings and channelising them into most productive use: They encourage individuals and institutions to save by providing avenues for investment and then direct these pooled savings towards businesses and projects that offer the highest potential returns and are most productive for the economy.
Facilitates price discovery: Through the interaction of buyers and sellers, financial markets help in determining the prices of financial assets like stocks and bonds, reflecting their underlying value and market sentiment.
Provides liquidity to financial assets: They allow investors to easily buy and sell financial assets, converting them into cash when needed without significant loss of value. This liquidity makes investments more attractive.
Reduces the cost of transaction: By providing a centralized platform and standardized procedures, financial markets reduce the time and effort required for investors to find each other and conduct transactions, thereby lowering overall costs.

3. Classify the Financial Market.

Classification of Financial Market

Solution: Financial markets can be broadly classified into two main segments based on the maturity period of the financial instruments traded:

Money Market: This market deals with short-term funds. Instruments traded here have a maturity period of less than one year. It is characterized by high liquidity and low risk.
- Features of Money Market: It is a market for short-term funds, typically lacks a fixed geographical location, and involves major institutions like the Reserve Bank of India (RBI), commercial banks, LIC, and GIC. Common instruments include call money, treasury bills, commercial paper, and certificates of deposit.
- Instruments of Money Market: Key instruments include Call Money (short-term loans between banks), Treasury Bills (T-Bills - short-term government debt), Commercial Bills (short-term tradeable instruments), Commercial Paper (CP - unsecured short-term promissory notes), and Certificates of Deposits (CDs - negotiable money market instruments issued by banks).
Capital Market: This market deals with medium and long-term funds. It comprises all organizations, institutions, and instruments that provide funds for periods longer than one year. It is crucial for financing long-term investments and economic growth.
- Features of Capital Market: It acts as a link between savers and investment opportunities, deals in long-term investments, utilizes intermediaries, is a determinant of capital formation, and is subject to government rules and regulations.
- Types of Capital Markets: The capital market is further divided into:
  1. Primary Market (New Issue Market): Securities are issued for the first time by companies to raise capital. Methods of flotation include Public Issue through Prospectus, Offer for Sale, Private Placement, and Rights Issue (for existing companies).
  2. Secondary Market (Stock Exchange): This market involves the trading of previously issued or 'second-hand' securities among investors.

4. What is a Stock Exchange?

Stock Exchange

It defines as "an organisation or body of individuals, whether incorporated or not established for the purpose of assisting, regulating and controlling of business in buying, selling and dealing in securities."

Solution: A Stock Exchange is a formal organization or body, which can be incorporated or unincorporated, established with the primary objective of facilitating, regulating, and controlling the business of trading in securities. It provides a regulated marketplace where buyers and sellers can transact in stocks, bonds, and other financial instruments, ensuring fair practices and transparency.

5. Who are the Types of Operators in a Stock Exchange?

Types of Operators in Stock Exchange

(i) Brokers (ii) Jobbers (iii) Bulls (iv) Bears (v) Stag

Solution: The Stock Exchange ecosystem involves various participants or operators, each playing a distinct role:

Brokers: These are intermediaries registered with the stock exchange who buy and sell securities on behalf of their clients (investors). They earn commission for their services.
Jobbers: Historically, jobbers were dealers who traded securities for their own account, quoting both buying and selling prices. They aimed to profit from the difference (spread) between these prices. In modern exchanges, their role is largely subsumed by market makers.
Bulls: These are market operators who anticipate a rise in security prices and therefore buy securities with the expectation of selling them later at a higher price to make a profit.
Bears: Conversely, bears are operators who expect a fall in security prices. They sell securities they do not own (short selling) with the hope of buying them back later at a lower price, thus profiting from the price decline.
Stag: A stag is an individual who applies for new issues of shares or securities in the primary market, not with the intention of holding them, but with the aim of selling them quickly in the secondary market at a profit, especially if the issue is oversubscribed.

6. What are the Functions of a Stock Exchange/Secondary Market?

Functions of Stock Exchange/Secondary Market

(i) Economic barometer (ii) Pricing of securities (iii) Safety of transactions (iv) Contributes to economic growth (v) Spreading of equity cult (vi) Poviding scope for speculation (vii) Liquidity (viii) Better allocation of capital (ix) Promotes the habits of savings and investment

Solution: A Stock Exchange, as the primary venue for the secondary market, performs numerous vital functions for the economy and its participants:

Economic Barometer: The movement of stock prices on the exchange generally reflects the overall health and performance of the economy. Rising prices often indicate economic expansion, while falling prices may signal a downturn.
Pricing of Securities: It provides a continuous and dynamic mechanism for determining the fair market price of securities through the forces of demand and supply.
Safety of Transactions: Stock exchanges enforce rules and regulations to ensure that all transactions are conducted fairly and transparently, providing a degree of safety and confidence to investors.
Contributes to Economic Growth: By facilitating the efficient allocation of capital and encouraging investment, stock exchanges play a significant role in fostering economic growth and development.
Spreading of Equity Cult: They help in popularizing the concept of equity investment among the general public, encouraging wider ownership of corporate assets.
Providing Scope for Speculation: While often viewed negatively, speculation (undertaking risk with the hope of profit) in a regulated manner can provide liquidity to the market and help in price stabilization.
Liquidity: It offers investors the ability to buy and sell securities easily, converting their investments into cash when needed, which is a key attraction for investors.
Better Allocation of Capital: By directing funds towards companies and sectors that are performing well and are in demand, the stock exchange ensures that capital is allocated to its most productive uses.
Promotes the Habits of Savings and Investment: The availability of investment opportunities and the potential for returns encourage individuals to save a portion of their income and invest it wisely.

7. Describe the Trading Procedure on a Stock Exchange.

Trading Procedure on a Stock Exchange

Selection of broker

Placing order

Execution of order

Settlement

Solution: The trading procedure on a modern stock exchange, especially with screen-based trading, typically involves the following steps:

Selection of Broker: An investor first needs to open a trading account with a registered stockbroker. This involves providing necessary documents and KYC details. The broker acts as an intermediary between the investor and the stock exchange.
Placing Order: Once the trading account is active, the investor can place an order with their broker to buy or sell a specific security. The order specifies the name of the security, the quantity, and the price at which the transaction should be executed (limit order) or the best available price (market order).
Execution of Order: The broker then transmits this order to the stock exchange's electronic trading system. The system matches buy and sell orders based on price and time priority. When a matching order is found, the transaction is executed.
Settlement: After the execution of the trade, a settlement process takes place. This involves the transfer of securities from the seller's account to the buyer's account and the corresponding transfer of funds from the buyer's account to the seller's account. This process is typically handled by a depository and clearing corporation within a specified timeframe (e.g., T+2, meaning trade day plus two days).

8. What are Some Benefits of Online Stock Exchange Trading?

Some Benefits of on Line Stock Exchange

(i) Demutualisation (ii) Dematerialisation

Solution: Online stock exchange trading has brought about significant advancements and benefits, primarily through:

Demutualisation: This refers to the process of separating the ownership, management, and trading rights of a stock exchange. It transforms the exchange from a member-owned entity into a corporate entity, improving governance, transparency, and accountability. This separation allows the exchange to operate more professionally and focus on market development rather than just member interests.
Dematerialisation: This is the process of converting physical share certificates into electronic form, which are then held in a demat account with a depository. Online trading heavily relies on dematerialised shares, as it enables faster, safer, and more efficient transfer of ownership electronically, eliminating risks associated with physical certificates like forgery, bad delivery, and delays.

These two processes together have modernized stock market operations, making them more accessible, efficient, and secure for investors worldwide.

9. Name the All India Level Stock Exchanges.

All India Level Stock Exchange

India has two All India level stock exchanges. These are

(i) National Stock Exchange of India (NSEI)

(ii) Over The Counter Exchange of India (OTCEI)

Solution: India has two prominent stock exchanges that operate at an all-India level, providing nationwide trading platforms:

National Stock Exchange of India (NSEI): Established in 1992, NSEI is the leading stock exchange in India, offering a fully automated, screen-based trading system. It provides a wide range of indices, including the NIFTY 50, and facilitates trading in equities, derivatives, and debt instruments.
Over The Counter Exchange of India (OTCEI): Established in 1990, OTCEI was designed to provide a nationwide trading platform, especially for small and medium-sized companies, promoting transparency and accessibility. However, its operations have been limited compared to NSEI.

10. What are the Common Features of NSEI and OTCEI?

Common Features of NSEI and OTCEI

(i) Nation wide coverage (ii) Ringless (ii) Screen based trading (iv) Transparency (v) Incorporated entities backed by financial institutions

Solution: Both the National Stock Exchange of India (NSEI) and the Over The Counter Exchange of India (OTCEI), despite their differing scales of operation, share several common features that define modern stock exchanges:

Nationwide Coverage: Both exchanges aim to provide trading facilities across the entire country, connecting investors from various geographical locations.
Ringless Trading: Unlike traditional trading floors with physical 'rings', both NSEI and OTCEI operate without a physical trading ring. Trading is conducted electronically through computer networks.
Screen-Based Trading: They utilize sophisticated screen-based trading systems where buy and sell orders are entered into a computer network and matched electronically, ensuring speed and efficiency.
Transparency: The screen-based systems and regulatory oversight promote transparency in trading operations, allowing participants to view market data and transaction details.
Incorporated Entities Backed by Financial Institutions: Both exchanges are structured as incorporated companies and have received backing from major financial institutions, lending them credibility and stability.

These features collectively contribute to a more efficient, accessible, and reliable trading environment.

Common mistakes

Confusing the maturity period for Money Market vs. Capital Market instruments.
Not clearly distinguishing between the Primary and Secondary markets.
Overlooking the specific functions of a Stock Exchange.
Failing to identify the different types of operators in a stock exchange.

Revision tips

Create a table comparing the Money Market and Capital Market based on their features and instruments.
Draw a flowchart illustrating the trading procedure on a Stock Exchange.
Focus on understanding the specific functions of each component: Money Market, Capital Market, and Stock Exchange.
Memorize the key instruments of the Money Market and the methods of floatation in the Primary Market.

Practice MCQs

Q1. Which market deals with short-term funds with a maturity period of less than one year?

Q2. In which market are securities sold for the first time directly by the company?

Q3. Which of the following is NOT a function of financial markets?

Q4. What is the main purpose of a Stock Exchange?

Q5. Which of these is a common instrument of the Money Market?

Frequently asked questions

What is a Financial Market?

A Financial Market is a marketplace that connects individuals or entities with surplus funds (lenders/savers) to those who need funds (borrowers/investors), facilitating the flow of money and financial assets.

What are the main functions of a Financial Market?

Key functions include mobilizing savings and channeling them into productive uses, facilitating price discovery, providing liquidity to financial assets, and reducing transaction costs.

What is the difference between the Money Market and the Capital Market?

The Money Market deals with short-term funds (maturity less than one year), while the Capital Market deals with medium and long-term funds.

What is the Primary Market?

The Primary Market is where securities are issued for the first time by companies to raise capital. This is also known as the New Issue Market.

What is the Secondary Market?

The Secondary Market is where previously issued or 'second-hand' securities are traded between investors. The Stock Exchange is a prime example of a secondary market.

Who are the main operators in a Stock Exchange?

The main operators include Brokers (who execute trades on behalf of clients), Jobbers (who trade for their own account), Bulls (who expect prices to rise), Bears (who expect prices to fall), and Stags (who apply for new issues hoping to profit from a quick sale).

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