Introduction to Capital Markets for BBA students

Different financial instruments, Common stock vs preferred stock

1. Introduction to Capital Markets

2. FINANCIAL MARKET Financial Market refers to a marketplace, where creation and trading of financial assets, such as shares, debentures, bonds, derivatives, currencies, etc. take place. It plays a crucial role in allocating limited resources, in the country’s economy. It acts as an intermediary between the savers and investors by mobilizing funds between them.

3. Classification of Financial Markets By Nature of Claim Debt Market (Bond Market) The market where fixed claims or debt instruments, such as bonds are bought and sold between investors. Equity Market (Stock Market) Equity market is a market wherein the investors deal in equity instruments. Such as stocks/shares.

4. Classification of Financial Markets By Maturity of Claim Money Market The market where monetary assets such as commercial paper, certificate of deposits, treasury bills, etc. which mature within a year, are traded is called money market. 2. Capital Market The market where medium and long term financial assets are traded is a capital market. It is divided into two types.

5. Capital Markets 1. Primary Market A financial market, wherein the company listed on an exchange, for the first time, issues new security or already listed company brings the fresh issue. “NIM” Example: IPO 2. Secondary Market Alternately known as Stock market, a secondary market is an organized marketplace, wherein already issued securities are traded between investors, such as individuals, merchant bankers, stock brokers and mutual funds. Example: stock markets

6. Classification of Financial Markets By Timing of Delivery Cash Market (Spot Market) The market where the transaction between buyers and sellers are settled in real time. 2. Futures Market Futures market is one where the delivery or settlement of commodities takes place at a future specified date.

7. Classification of Financial Markets By Organizational Structure Exchange Traded Market A financial market, which has a centralized organization with the standardized procedure. Example: NYSE, LSE, PSX Over-the-counter market (OTC) Such markets have no centralized trading facility. Example: Forex Market/Currency Market

8. FINANCIAL INSTRUMENTS Financial Instruments are assets (claim) for people who hold them and liabilities (obligation) for the issuer. For example, securities such as bonds , stocks are a tradable financial instrument.

9. Major Financial Instruments Treasury bills Market participants: issued by government for regulating money supply and raise capital Short-term Issued through country’s central bank Riskiness: default free Maturity: 90days – 1 year

10. Major Financial Instruments Repurchase agreements Market participants: used by banks to adjust reserves- sell investments with a repurchase promise Riskiness: low risk Maturity: overnight to a year

11. Major Financial Instruments Commercial paper Market participants: issued by large corporations Short-term SECP sets up minimum requirements Requirements: company should have minimum capital of Rs . 100 million, should have a minimum rating of A- low default risk Maturity: up to 270 days

12. Major Financial Instruments Bonds: A bond, also known as a fixed-income security, is a debt instrument created for the purpose of raising capital. They are essentially loan agreements between the bond issuer and an investor. TYPES OF BONDS: Corporate bonds Issued by corporations Term Finance Certificates (TFCs)

13. Government Bonds in Pakistan 1. Pakistan Investment Bonds (PIBs): long-term, semi-annual (six monthly) coupon payments maturity: up to 10 Years. State Bank of Pakistan issues bonds in multiples of Rs. 100,000. 2 . Treasury Bills 3. Ijarah Sukuk  are low risk medium term investment instruments with coupon payments issued and guaranteed by the government of Pakistan. They pay semi-annual profit and are Shariah compliant

14. Major Financial Instruments Stock/equity Preferred stock Issued by corporation No voting rights Dividends Common stock Issued by corporation Very risky Voting rights Dividends