Which of the following is NOT true for capital market securities?

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → They are mainly issued by the government, banks and highly rated companies.

Option (1) They are considered liquid, as they are marketable on the stock exchanges. — True. Being marketable on the stock exchanges, they are considered liquid.

Option (2) They generally yield a higher return for investors than money market instruments. — True. Capital market investment generally yields a higher return, through capital gains, dividends and bonus issues.

Option (3) They are riskier, both with respect to returns and principal repayment. — True. Issuing companies may fail to perform as per projections, so these securities are riskier.

Option (4) They are mainly issued by the government, banks and highly rated companies. — False. The government, banks and highly rated companies are the main issuers of money market instruments. Their soundness is why the money market is safer.

NCERT (Pre-rationalised Edition): “(v) Liquidity: Capital market securities are considered liquid investments because they are marketable on the stock exchanges. However, a share may not be actively traded, i.e. it may not easily find a buyer. Money market instruments on the other hand, enjoy a higher degree of liquidity as there is formal arrangement for this. The Discount Finance House of India (DFHI) has been established for the specific objective of providing a ready market for money market instruments.”

“(vi) Safety: Capital market instruments are riskier both with respect to returns and principal repayment. Issuing companies may fail to perform as per projections and promoters may defraud investors. But the money market is generally much safer with a minimum risk of default. This is due to the shorter duration of investing and also to financial soundness of the issuers, which primarily are the government, banks and highly rated companies.”

“(vii) Expected return: The investment in capital markets generally yield a higher return for investors than the money markets. The possibility of earnings is higher if the securities are held for a longer duration. First, there is the scope of earning capital gains in equity share. Second, in the long run, the prosperity of a company is shared by shareholders by way of high dividends and bonus issues.”