Superior College University Campus 1

Lecture # 1

FINANCIAL MARKETS Chapter 1

To develop concepts of financial markets To understand some important facts market To know components of financial market To learn six parts of financial system To seek out five parts of money To be familiar with history and elements of

money

Lecture Outcomes

Financial market is the place where lenders and borrowers are allow to buy and sell financial securities

In general financial markets deals in 1. Securities 2. Commodities

Financial Markets

Stock exchange◦ Three stock exchanges (KSE, LSE, ISE, 1948,

1974, 1997, 84%, 14%, 1% 167 companies listed)

◦ 2006-7 GDP of Pak US $ 143 billion, 49% capitalization from stock markets.

◦ 1997 dropped due to nuclear issue◦ 2002 declared best market in world.◦ Small market but attractive ◦ Central Depository company (CDC)

Some facts about financial markets

Source: Iqbal, J (2008). “Stock Market in Pakistan: An Overview”

Money market Capital market

Types of financial markets

Money market is the market where short term credit instruments are traded.

Money Market

Money market in Pakistan Call loans Trading in credit ceiling Treasury bills (TBs) REPOs (Repurchase Agreements)

Instrument of Money Market

Central bank Commercial banks Government Non bank financial intermediaries (NBFI).

◦ Insurance ◦ Micro financial institutes◦ Pension funds◦ Thrift institutions ◦ Discount house etc.

Other participants

Participants/Institutes of Money Market

Capital market is the market for long term debts .when funds are lent for a period of more than one year.

The capital markets funds are used to finance long term investments.

Capital Market

Security market (stocks & bonds) Further divided into two categories

◦ Primary market◦ Secondary market

Non security market (Development Finance Institutes)

E.g. PICIC IDBP, ICP, SBFC, ADBP, HBFC,NIT

Types of Capital Market

Debt instrument ◦ Bonds◦ Government securities◦ Mortgages◦ Mutual funds

Issue of shares Primary Secondary

Instruments of capital markets

Six parts of financial system Money Financial instruments Financial markets Financial institutions Government regulatory agencies Central bank

1. Time (has value)2. Risk (requires compensation)3. Information (basis for decision)4. Markets (Markets Determine Prices and

Allocate Resources)5. Stability (improves welfare)

Five parts of money

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MONEY

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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

Latin Word MonetaMoney

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MONEY

“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”.

Elements of Money

MONEY

Medium of Exchange

Measures Value

Standard of deferred payments

Govt Approval

Resource Person : Muhammad Rafiq

Superior College University Campus 19

Primary Function

Secondary Function

Contingent Function

FUNCTIONS OF MONEY

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Functions Of Money

Primary Function

SecondaryFunction

Contingent Function

Medium of exchange

Standard of Value

Store of wealth

Standard of deferred payments

Money as liquid assets

Money as guarantee of solvencyMedium of Govt payments

Transfer of wealth

Basis of bank credit

Distribution of national Income

Distribution of joint product

Maintenance of accounting record

Chapter Summary Why Study Financial Markets?:

◦ the three primary markets (bond, stock, and foreign exchange) were briefly introduced.

Why Study Financial Institutions?:

◦ the market, institutions, and key changes affecting these were outlined.

Chapter Summary (cont.) What is money and its characteristics.

What are element of money.◦ Medium of exchange

◦ Measures value

◦ Standard of deferred payment

◦ Government approval

◦ Money definitions and elements

◦ Functions of money