Financial Market

Financial market can be defined as the market where demanders and suppliers of funds interact with each other and make transactions.

Classification:
Financial market is categorized as: 1. Money market. 2. Capital Market.

Role of Financial Markets:

The financial markets provide products to consumers and financial intermediaries allow for the mobilization of money between savers and borrowers. The share markets main function in the economy is to allow consumers to attain part-ownership of a company and further their wealth and in effect provide funds for businesses for expansion. The main effects the share market has on the economy is its ability to reallocate resources and mirror overall economic growth. The financial services industry is one of the largest industries in Pakistan and its actions influence all other sectors due to its vital role in the economy. They allow those who have excess funds to make these funds available to those who need additional money. The most influential institutions in the financial sector are financial intermediaries who are those organizations that allow the mobilization of money. Financial intermediaries create a bridge between borrowers and savers in that they receive accumulated funds from individuals or firms and then allow for other firms and individuals to borrow and make use of that money. Financial markets provide an efficient process by which income that is not used for consumption and remains idle can be utilizes in a well and better way. Government use financial products to raise huge sum of capital to make it available for constructive measures.

Money Market
Money market is that part of financial market where suppliers and demanders of short term funds and securities interact with each other and make transactions. It is that component of the financial market for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames.

Common money market instruments

Treasury bills commercial paper bankers' acceptances certificates of deposit short-lived mortgage Repurchase agreements

Role of money market:

Economic development

If the money market is well developed and broad based in a country, it greatly helps in the economic development of a country.

Help to central bank

With the help of a strong money market the central bank can use its monetary policy effectively and can bring desired changes in the economy for the industrial and commercial progress in the country.

Financing Industry

A well developed money market helps the industries to secure short term loans for meeting their working capital requirements. It thus saves a number of industrial units from becoming sick.

Financing trade

An outward and a well knit money market system play an important role in financing the domestic as well as international trade. The traders can get short term finance from banks by discounting bills of exchange. The acceptance houses and discount market help in financing foreign trade.

Profitable investment

The money market helps the commercial banks to earn profit by investing their surplus funds in the purchase of. Treasury bills and bills of exchange, these short term credit instruments are not only safe but also highly liquid. The banks can easily convert them into cash at a short notice.

Self sufficiency of banks

The money market is useful for the commercial banks themselves. If the commercial banks are at any time in need of funds, they can meet their requirements by recalling their old short term loans from the money market. Effective implementation of monetary policy

The well developed money market helps the central bank in shaping and controlling the flow of money in the country. The central bank mops up excess short term liquidity through the sale of treasury bills and injects liquidity by purchase of treasury bills.

Encourages economic growth

If the money market is well organized, it safeguards the liquidity and safety of financial asset; this encourages the twin functions of economic growth, savings and investments.

Help to government

The organized money market helps the government of a country to borrow funds through the sale of Treasury bills at low rate of interest The government thus would not go for deficit financing through the printing of notes and issuing of more money which generally leads to rise in an increase in general prices.

Proper allocation of resources

In the money market, the demand for and supply of loan able funds are brought at equilibrium. The savings of the community are converted into investment which leads to pro allocation of resources in the country.

Capital market:
Capital market is a type of financial market that enables suppliers and demanders of long term funds to make transactions.

Classification:
Capital markets may be classified as primary markets and secondary markets.

1. Primary market:
The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue.

2. Secondary market:
The secondary market, also called aftermarket, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. A market where investors purchase securities or assets from other investors, rather than from the issuing company. a) Organized Market: A central physical location where exchange of securities takes place under a set of rules and regulations. This type of market is also referred to as Auction Market. An organized market has a physical location where companies and governments trade their shares. Only the companies registered in the stock exchange trade their securities through an organized market. Karachi Stock Exchange (KSE) (1947) Lahore Stock Exchange (LSE) (1997) Islamabad Stock Exchange (ISE) (1974) are its examples. b) Over the Counter Market: An Over the counter market does not have any physical location where institutes or people could transact. The companies that are not registered in stock exchange trade their securities through over the counter market, where telephonic devices and internet etc are used to sale and purchase securities because there is no central exchange or meeting place for this market.

Role of capital market:

Economic growth

Capital market plays an extremely important role in promoting and sustaining the growth of an economy. It is an important and efficient conduit to channel and mobilize funds to enterprises, and provide an effective source of investment in the economy. Mobilizing resources

It plays a critical role in mobilizing savings for investment in productive assets, with a view to enhancing a country's long-term growth prospects.

Raising capital for businesses

The Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public.

Mobilizing savings for investment

When people draw their savings and invest in shares it usually leads to rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to help companies' management boards finance their organizations.

Facilitating company growth

Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets.

Profit sharing

Both casual and professional stock investors, as large as institutional investors or as small as an ordinary middle class family, through dividends and stock price increases that may result in capital gains, share in the wealth of profitable businesses.

Creating investment opportunities for small investors

As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors.

Government capital-raising for development projects

Governments at various levels may decide to borrow money to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government.

Financial intermediaries and their functions: Financial intermediaries are actually those financial institutions that accept money from savers and use those funds to make loans and other financial investments in their own name in Pakistani institutions. The financial intermediary sector of Pakistan is composed of the money market and capital markets, with primary and secondary dealers. Key FIs are comprised of State Bank of Pakistan (SBP), commercial banks, non-bank financial institutions (NBFIs) and insurance companies. Financial Intermediaries are providing credit to Pakistani industry so that it could be improved. Agriculture sector in Pakistan is being improved by financial intermediaries and markets because they are providing farmers with short term and long term loans and machinery is given to them on lease. Housing schemes are being introduced in Pakistan so that societies could be built and houses and plots could be given to individuals on installments. Financial institutions and markets in Pakistan are helping in poverty reduction by providing loans at low interest rates.