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Basic Financial System: ................................................................................................................................. 2 Financial Market: .......................................................................................................................................... 2 Pakistan Financial Market Structure: ............................................................................................................ 3 Money Market .......................................................................................................................................... 3 Money Market Players: ............................................................................................................................. 4 Money Market Products: .......................................................................................................................... 4 Capital Market: ......................................................................................................................................... 4 Pakistan Debt Market ............................................................................................................................... 5 Equity Market: .......................................................................................................................................... 5 Equity Market Products: ........................................................................................................................... 6 Derivative Market: .................................................................................................................................... 6 Derivatives in Pakistans Capital Market:.................................................................................................. 7 Stock Index Futures:.................................................................................................................................. 7 Cash Settled futures: ................................................................................................................................. 7 Deliverable Futures: .................................................................................................................................. 8 Mutual Funds: ........................................................................................................................................... 8 Types of Mutual Funds.............................................................................................................................. 8 Open-ended Funds.................................................................................................................................... 8 Closed-end Funds ...................................................................................................................................... 8 Roles Among Financial Intuitions:............................................................................................................... 11
The funds from lenders to borrows are transferred via financial intermediaries or financial market. A perfect example of financial intermediary is a bank which collects funds from borrows in shape of deposits and lend those funds in shape of loan. In financial markets, the borrowers collect the funds by sharing ownership of their companies in shape of securities or pay coupon by issuing bonds. Furthermore, the financial intermediaries and financial market are also interconnected to each other
Financial Market:
Financial is a marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives. The buyers comes in financial market in order for the purpose of investment and sellers comes here for the purpose of acquiring finance for the businesses.
Money Market
Money market refers to the market for short term assets that are close substitutes of money, usually with maturities of less than a year.
Capital Market:
Capital market is a financial market in Pakistan where long term debts and equity type securities and derivatives are traded. Here long term means the security must have the maturity greater than one year. The companies consider capital market for long term investment to their businesses. The capital market securities have two major types, The debs security and equity type security. In debts securities, the institutions issue bonds in order to borrow funds and in equity type security, the institutions issue securities which let the owner of security to enjoy ownership of that specific institution in order to share the profit and loss. When a financial instrument is first issued, it is sold in the primary market. A secondary market is such in which financial instruments are resold among investors. No new capital is raised by the issuer of the security. Trading takes place among investors. Secondary markets are also classified in terms of organized stock exchanges and over-the counter(OTC) markets. Stock exchanges are
central trading locations where financial instruments are traded. In contrast, an OTC market is generally where unlisted financial instruments are traded.
Equity Market:
Equity market is a market where shares of the companies are traded. The share of a company gives the ownership of the company to the share holder so shareholder can share the profit and loss of a company. When a financial instrument is first issued, it is sold in the primary market which is called Initial Public Offering . A secondary market is such in which financial instruments are resold among investors. No new capital is raised by the issuer of the security. Trading takes place among investors. Secondary markets are also classified in terms of organized stock exchanges and over-the counter(OTC) markets. Stock exchanges are central trading locations where financial instruments are traded. Some major stock exchanges of Pakistan are, Karachi Stock Exchange, Lahore Stock Exchange and Islamabad Stock Exchange In contrast, an OTC market is generally where unlisted financial instruments are traded.
Derivative Market:
Derivative is a financial instrument whose characteristics and value depend upon the characteristics and value of an underlying asset, typically a commodity, bond, equity or currency. Examples of derivatives include futures and options (Source: Investor Words.com) Financial markets can be classified in terms of cash market and derivative markets. The cash market, also referred to as the spot market, is the market for the immediate purchase and sale of a financial instrument. In contrast, some financial instruments are contracts that specify that the contract holder has either the obligation or the choice to buy or sell another something at or by some future date Pakistan equity derivatives products were launched on the Karachi Stock Exchange in 2001. Initially one month deliverable single stock futures were introduced.
Financial
commodities
Future,)
Index Features
Deliverable Futures:
Forward contract to buy and sell an underlying instrument with actual delivery of underlying instrument. Settlement occurs 30 days after the contract is purchased.
Mutual Funds:
A mutual fund is a collective investment scheme, which specializes in investing a pool of money collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. A fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus. One of the main advantages of funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them.
Open-ended Funds
These funds are in a continuous process of issuing shares/ units on demand and redeeming shares/ units on demand. The shares/ units do not trade on a market. The number of shares/ units outstanding varies each time the net asset valuation calculation is carried out, which is daily for most open-ended funds.
Closed-end Funds
Closed-end funds issue a specific number of shares. Their capitalization is fixed. The shares are not redeemable, but are readily transferable and traded on either a stock exchange or the overthe-counter market. The price of a closed-end fund share fluctuates based on investor supply and demand. Closed-end funds are not required to redeem shares and have managed portfolios Products of Mutual funds:
Depositaries: Central Depository Company of Pakistan Limited (CDC) is the only depository in Pakistan. The Company started operations in September 1997. CDC is the sole entity handling the electronic (paperless) settlement of transactions carried out at all three stock exchanges of the country. Non Banking Financial Institutions: A non-bank financial institution (NBFI) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency but facilitates bank-related financial services. In Pakistan, Following are some non banking financial intuitions: Leasing Companies Investment Banks Modarba Companies Housing Finance Companies Pakistan Financial Regulation: There are two main regulatory authorities in Pakistan which regulate and control the financial institution according to prescribed laws: State Bank of Pakistan Security and Exchange Commission of Pakistan The following table is displaying the role of these authorities in order to control financial institutions: