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Role of Financial Markets in Pakistan

2012

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 in the economy of Pakistan:


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. 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 Financial Markets in Pakistan


2012

Role of money market in the economy of Pakistan:


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. 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. 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 Pakistan 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 proper allocation of resources in the country.

Role of Financial Markets in Pakistan


2012

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 in the economy of Pakistan:


Economic growth

Capital market plays an extremely important role in promoting and sustaining the growth of Pakistan economy. It is an important and efficient 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 Pakistan's long-term growth prospects. 3

Role of Financial Markets in Pakistan


2012

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.