MONEY, BANKING & FINANICE

WEEK 1: FINANCIAL MARKETS

Wednesday, April 20, 2016

What is Financial Market?

A financial market is a market in which people trade financial securities, commodities, and other
fungible (mutually interchangeable / replaceable by another identical market) items of value at
low transaction costs and at prices that reflect supply and demand.
Securities include stocks and bonds, and commodities include precious metals or agricultural
products.
The financial market is a broad term describing any marketplace where buyers and sellers
participate in the trade of assets such as equities, bonds, currencies and derivatives.
Some facts about Financial Markets in Pakistan (Stock Exchanges):

There are three stock exchanges in Pakistan; KSE, LSE, ISE.

KSE founded in 1948, LSE founded in 1974 and ISE found in 1997.
Various public and private limited companies are listed with these stock exchanges.
In 1997 KSE dropped due to nuclear issue.
In 2002 KSE declared the best stock market in the world.
Small markets but attractive.

Types of Financial Markets:

There are two types of financial markets:
1. Money Market
2. Capital Market
1 Money Market:
The money market is a segment of the financial market in which financial instruments with high
liquidity and very short maturities are traded. The money market is used by participants as a
means for borrowing and lending in the short term, from several days to just under a year.
Money market securities consist of negotiable certificates of deposit (CDs), banker's
acceptances, U.S. Treasury bills, commercial paper, municipal notes, eurodollars, federal funds
and repurchase agreements (repos). Money market investments are also called cash
investments because of their short maturities.
Money markets trading instruments in Pakistan:
Call Loans (A call loan is a loan that the lender may force the borrower to repay at any
time.)
Treasury bills
REPOs (Repurchase Agreements, (repo) is a form of short-term borrowing for dealers in
government securities. The dealer sells the government securities to investors, usually on
an overnight basis, and buys them back the following day)

Participants / Institutions of Money Market:

There are number of participants / institution that trade in money markets are as follows.

Central Bank
Commercial Banks
Government
SYED RAHEEL HASSAN

raheelzhere@gmail.com

MONEY, BANKING & FINANICE

WEEK 1: FINANCIAL MARKETS

Non-Bank Financial Intermediaries (NBFIs)

o Insurance companies
o Micro finance companies
o Pension funds
o Discount houses

2. Capital Markets:
A capital market is one in which individuals and institutions trade financial securities.
Organizations and institutions in the public and private sectors also often sell securities on the
capital markets in order to raise funds. Thus, this type of market is composed of both the
primary and secondary markets. There are following types of capital markets.

Security markets those trade in bonds and shares.

Primary market and secondary market.
Non-security markets (Development Finance Institutes e.g. IDBP, HBFC)

Capital Market trading Instruments in Pakistan:

Share / stock certificates.

Bonds, Government securities, Mutual funds

What is Financial System?

A financial system refers to a system which enables the transfer of money between investors
and borrowers.
Parts of Financial System:
Money
Financial Instruments
Financial Markets
Financial Institutions
Government Regulatory Agencies
Central Bank
What is Money?
The word money is derived form the Latin word MONETA which was the surname of the Roman
Goddess of Juno in whose temple money was coined

Anything that is generally acceptable as a medium of exchange & at the same time acts as a
measure and store of value is called money
Anything of value that serves as a (1) generally accepted medium of financial exchange, (2)
legal tender for repayment of debt, (3) standard of value, (4) unit of accounting measure, and (5)
means to save or store purchasing power.
Elements of Money:

Medium of exchange.
Legal tender for repayment of debt
Standard to measure of value
Means to save or store purchasing power

SYED RAHEEL HASSAN

raheelzhere@gmail.com

MONEY, BANKING & FINANICE

WEEK 1: FINANCIAL MARKETS

Functions of Money:
Primary Functions:
Medium of Exchange: Money serve as a medium of exchange. It is used to make payments for
goods and services. Different goods can be sold in terms of money and this money can be used
to purchase other goods. So it acts as a medium of exchange between the buyer and the seller.
Measure of Value: Money is used to measure the value of everything (Except love, life, care,
respect etc.) in the same way as we can measure the weight in Kilograms and distance in
Kilometers. It acts as a standard of Value. Goods and services are priced and valued in terms of
money.
Secondary Functions:
Monetary Management: Money is very important factor of monetary and fiscal policies.
Collection of taxes and public finance management is only possible in terms of money. Under
barter system, it is impossible to collect taxes in the form of goods and then to use the amount
of
tax
for
the
development
projects.
Future Payments: The money has removed the inconvenience of future payments. Now the
loans can be taken from banks and financial institutions. The future payments can be stated in
terms
of
money.
Income and Consumption: Income and consumption of different factors of production is
determined in terms of money. Money helps in determination, valuation and budgeting of
expenses and revenues.
Specialization: In barter system specialization is not possible because everyone tries for selfsufficiency. Work specialization has been made possible because of use money. Specialization
has played vital role to up lift the economy.
Economic Activities: All kinds of economic activities such as investment, savings, credit,
advances etc. are made in terms of money. The use of money has facilitated the expansion of
trade.
Market Mechanism: The use of money provides basis of market mechanism. The demand and
supply are two major forces of market which work only because of money. Money is a factor
which leads to the determination of prices, demands and supply.
Promote Foreign Trade: Money has made possible the huge foreign investment in today's
world. Under barter system the foreign investment was not possible but the use of money made
it possible because in money economy wealth can easily be transferred from one place to
another.
Transfer of Wealth: Money also serve as a means of transferring value from one place to
another place. A person may sell his movable and immovable property for money at one place
and can use that money to purchase property at some other place.

SYED RAHEEL HASSAN

raheelzhere@gmail.com

MONEY, BANKING & FINANICE

WEEK 1: FINANCIAL MARKETS

Contingent Functions: Besides the primary and secondary functions, Professor Kinley has
also given following four contingent functions:
Distribution of National Income: With the help of money, it is possible to determine and
distribute national income among various classes of society.
Basis of Credit System: Money also provide the basis of bank credit. Bank creates credit only
when they possess cash. Also the money value of securities is considered by banks while
granting loans. Different negotiable instruments also work on the basis of
money.
Maximum Satisfaction: Money enables consumers to get maximum satisfaction through the
law of Equi-marginal utilities. Similarly the producer can get maximum profit by equalizing the
marginal productivity of different factors of production.
Liquidity of Wealth: Money gives a liquid form to wealth. A property can be converted into
liquid form with the use of money.

SYED RAHEEL HASSAN

raheelzhere@gmail.com