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Financial Markets
A financial market is a place where people come and trade their financial securities,
commutable stuff of value and their commodities at low and acceptable or reasonable prices
which reflect supply and demand. Securities include bonds, notes, debenture, options,
warrants, shares (Stocks), and commodities include agricultural products and precious metals.

Fungible
this is exchangeable for something of same value or equaling, interchangeable, replaceable,
substituted.

Derivative
Any financial stuff whose value depends on the costing of assets which includes warrants &
options etc .

Maturity
Is the Date when the payment is due?

Capital
Wealth and money; the term to acquire services and goods, especially in a non barter system.

Types of financial Markets and their roles:

Financial markets have many types, which includes

1.
2.
3.
4.

Primary markets
Secondary markets
Money markets
Capital markets

Primary Markets
It is a market place where new securities are issued. Government institutions, companies, and
public sector organizations may easily obtain funds after selling new bonds or stocks in the
primary market. They receive money with the sale of the securities which is then used either to
expand that business or to fund these ongoing operations.
Primary market is an important type of capital markets because newly issued securities and
bonds are important phase for any organization and may be known as one of the most
important thing in the expansion and in the capital gain of a business.

It is further divided into two types which includes

1.

PRIVATE PLACEMENT

2.

INITIAL PUBLIC OFFERING

1-PRIVATE PLACEMENT
The offer of securities to a moderately little number of selected financial specialists as a
method for raising capital Financial specialists included in private positions are typically huge
banks, common assets, insurance agencies and annuity reserves. Private position is the inverse
of an open issue, in which securities are made accessible available to be purchased on the open
business sector.

2-INITIAL PUBLIC OFFERING (IPO)

The main offer of stock by a privately owned business to general society Initial public offerings
are regularly issued by littler, more youthful organizations looking for the money to extend,
however should likewise be possible by expansive exclusive organizations hoping to end up
traded on an open market.

In an IPO, the guarantor gets the help of an endorsing firm, which offers it some assistance with
determining what kind of security to issue (normal or favored), the best offering cost and an
ideal opportunity to put up it for sale to the public.

Secondary Markets
Secondary market is a market where two investors are involved and securities are traded
between these two parties the secondary market are broker & dealer. These stocks and bonds
are issued in the public by the investors the Secondary markets comprises of two types of
markets the debt markets and the equity markets.
In this market the pre-issued securities are traded it could either be an auction market or a
dealer market which includes stock exchange as a market of auction while OTC (OVER THE
COUNTER) Market as dealer market.
All these transactions which are the part of secondary market it is done by the through stock
exchange and its purpose is to create liquidity in all the securities.
For example if an individual has bought some securities and now he wants to sell it he can do it
through a medium of stock exchange or through a broker presently KSC KARACHI STOCK
EXCHANGE is known as Pakistans main stock exchange.

Features of secondary markets

Creates liquidity
Encourages new investors
Finances the industry
Safe & fair dealing

Functions of secondary markets

regular information about the securities value

it helps in observing the prices of bonds & its interest rates
offers liquidity to the assets
it brings together interested parties

TYPES OF SECONDARY MARKETS

1.

OTC

2.

STOCK EXCHANGE

1- OTC MARKET
OTC market which is called over the counter market it is also called dealer market
Bonds, derivatives, and currencies are traded at over the counter market dealers and brokers
list the bid and the offer prices
There are generally no Requirements for listing .When a broker or dealer wants to buy an OTC
stock, he contacts the market maker listing that security. For stocks, there are two specific OTC
markets, the Pink Sheets & OTC Bulletin Board

2-STOCK EXCHANGE
Stock exchange is the place where securities are bought and sold all The stock exchanges have
some specific requirements which a company should meet before they are listed on the stock
exchange the most common requirements
Which they want is the minimum market value of the company and the minimum market share
that they have and number of holder in public stock. The stock exchange charges commissions
and fees

Money Markets
It is the segment or part of the financial market which involved in the short term borrowing or
debts, lending, selling and buying with the maturities of one year or less. The maturities start
from several days to just under a year.
The securities of money market consist of treasury bills, certificates of deposits, bankers
acceptances, municipal notes and much more.
Money markets that provide liquidity for the global financial system and the financial markets
are provided by the capital markets.

Importance of money markets

Money market plays an important role in the process of industrialization and economic
development of any country. Important factors of a well-developed money market are as
under:

1. Financing Trade:
Money Market plays a vital role in financing the internal as well as the international trade.
Commercial financing is available to traders through exchange bills, discounted by the bill
market. The acceptance houses and discounted markets help in financing foreign trade.

2. Financing Industry:
Money market contributes the growth of industries in the following two ways:
(a) Money market provides helps to the industries in securing short-term loans in order to meet
their working capital requirements through the process of finance bills, and commercial papers,
etc.
(b) Generally Industries need long-term loans, provided in the capital market. The short-term
interest rates of the money market influence the long-term interest of the capital market. Thus,
means that money market indirectly helping the industries with its link with and influence on
long-term capital market.

3. Profitable Investment:
Money market enables the commercial banks to use their extra reserves in an investment that
is more profitable. The main goal of the commercial banks is to earn profit from its reserves as

well as to maintain liquidity to meet the cash demand of the depositors that is uncertain. In the
money market, the reserves that are excess of the commercial banks are invested in nearmoney assets (e.g. short-term exchange bills) which are most liquid and easily convertible into
cash. Thus, in that way the commercial banks earn profits without losing liquidity.

4. Self-Sufficiency of Commercial Bank:

Developed money market helps the commercial banks to be self-sufficient. When there is a
situation of emergency, where the commercial banks face scarcity of funds, so they dont need
to approach the central bank to borrow at a higher interest rate. On the other hand, banks can
easily meet their requirements by recalling their old short-run loans from the money market.

5. Help to Central Bank:

Although the central bank have the function of controlling and influencing the banking system
in the absence of a money market, the existence of a well-developed money market smoothens
the functioning and also increases the efficiency of the central bank.

Money market helps the central bank in the following two ways:
(a) The short-run interest rates of the money market serves as an indicator of the monetary and
banking policies and, thus, guide the central bank to adopt a proper banking policies and
procedures,
(b) The integrated money market helps the central bank to secure and achieve effective
implementation of its policies and regulations in the sub markets.

Instruments of the Money Market

The money market is that area in which financial institutions make available the opportunity
to a broad range of borrowers and investors to buy and sell various forms of short-term
securities. There is no physical "money market." It is an informal network of banks and traders
linked by telephones, fax machines, and computers.
The short-term debts and securities sold on the money markets are known as money market
instrumentsthey have maturities ranging from one day to one year and are highly liquid.
Treasury bills, federal agency notes, certificates of deposit (CDs), Eurodollar deposits,

commercial paper, bankers' acceptances, and repurchase agreements are all examples of
instruments. The suppliers of funds for money market instruments are institutions and
individuals who prefer for the highest liquidity and the lowest risk.
The money market is important for businesses because it allows companies with temporary
surplus cash to invest in short-term securities. In essence the market acts as a repository for
short-term funds. Large corporations generally handle their own short-term financial
transactions. Small businesses, on the other hand, often choose to invest in money-market
funds.
Although securities purchased on the money market carry less risk than long-term debt but
they are not risk free. After all, banks do sometimes fail, and the fortunes of companies can
change rapidly.

TYPES OF MONEY MARKET INSTRUMENTS

Treasury Bills:
Treasury bills, also called as (T-bills) are short-term notes that are issued by the government.
They come in three different types of maturity: 90, 180, and 360 days. The two short types are
being auctioned on weekly basis, while the annual types are auctioned monthly. T-bills can be
purchased directly through auctions and indirectly through the secondary market. Purchasers at
auction can enter a competitive bid or a noncompetitive bid. Noncompetitive bids are supplied
at the average price of all the successful competitive bids.
Commercial Paper:
Commercial paper is unsecured short-term promissory notes that are issued by both financial
and nonfinancial corporations. Commercial paper has the maturities of up to 270 days (the
maximum allowed without SEC registration requirement. Commercial paper is typically issued
by large and credit-worthy corporations with unused lines of bank credits and therefore it
carries low default risk.
The other types of money-market instruments, where banks act as intermediaries between
buyers and sellers, commercial paper is issued directly by both well-established companies, and
by financial institutions. Banks may act as agents in the transaction. Companies can also sell
commercial paper through different dealers who charge a fee and make arrangements for the
transfer of the funds from the lender to the borrower.

Bankers' Acceptances:
It is an instruments produced by a nonfinancial corporation, but in the name of a bank. It is a
document that indicates that such-and-such bank shall pay the face amount of the instrument
at some specific future time. The bank accepts this instrument, acting as a guarantor. Generally
Bankers' acceptances are used to finance foreign trade, but they also arise when companies
purchase goods on credit or they need to finance inventory. The maturity of Bankers'
acceptances ranges from one to six months.

CAPITAL MARKETS
It is a market place where long term securities are bought and sold between the parties .Which
may be debt or equity kind of securities; long term investments can help the organizations to
maximize its profits and liquidity Capital is a vital thing for the economy so capital markets play
an important role in the economy as well.

In this market stocks and bonds are issued to raise the funds specially by some government
organizations it works like a link for savers and investors it works very well to move resources
from the area of surplus to the area of deficit.
It includes two types of markets

1.

Stock market (equity)

2.

Bonds market (debt)

Capital market is classified as primary and secondary market.