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Financial market is a market where suppliers and demanders of funds can transact business directly.

Money market and capital market are both parts of a financial market.

Capital Market
A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as: A market in which money is provided for periods longer than a year. 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.

Features of primary markets are:


The primary market is the market where the securities are sold for the first time. Therefore it is also called the new issue market (NIM). In a primary issue, the securities are issued by the company directly to investors. The company receives the money and issues new security certificates to the investors. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. The primary market performs the function of facilitating capital formation in the economy.

Methods of issuing securities in the primary market are:

Initial public offering (is the first sale of stock by a private company to the public. It can be
used by either small or large companies to raise expansion capital and become publicly traded enterprises.) Rights issue (for existing companies); (A rights issue is an issue of additional shares by a company to raise capital)

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. Such as the New York Stock Exchange and the NASDAQ are secondary markets. Secondary marketing is vital to an efficient and modern capital market. In the secondary market, securities are sold by and transferred from one investor to another. It is therefore important that the secondary market be highly liquid.

Features of secondary market:


The secondary market is the market where the existing securities are sold. In secondary issue, securities can be sold from one investor to another investor. Instruments (stock and bonds) already issued in primary market are traded in secondary market. In any secondary market trade, the cash proceeds go to an investor rather than to the underlying company/entity directly.

Stock Exchanges and Their Functioning


A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and dividends. Securities traded on a stock exchange include shares issued by companies, debentures and bonds. 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.

Functions:
Stock exchanges have multiple roles in the economy. This may include the following:

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.

The Role of SECP in Regulating the Capital Markets in Pakistan


Securities and Exchange Commission Pakistan:
The Securities and Exchange Commission of Pakistan (SECP) is an independent body whose purpose is to develop a modern and efficient capital market based on sound regulatory principles, in order to encourage economic growth and prosperity in Pakistan. Role of SECP: Capital market plays an important role to mobilize domestic resources and channel them efficiently to productive uses thus raising productivity. The level of capital market is thus, an important determinant of a country's level of savings, efficiency of investment and ultimately its rate of economic growth. The equity capital market in Pakistan has demonstrated a positive and steady growth. The Karachi Stock Exchange (KSE) share index and aggregate market Capitalization (AMC) recorded an increase of 41.1 percent and 48.3 percent respectively in 2007 and the Karachi Stock Market has sustained its position as one of the best performing markets around the world. It is indeed, noteworthy that at current levels, KSEs market capitalization (total value of the tradable shares of a publicly traded company; it is equal to the share price times the number of shares outstanding) is equivalent to about 44.3 percent of estimated GDP of 2006. Average daily turnover of 294 million shares is remarkable, which makes KSE one of the most liquid markets. Over the last few years, there has been a tremendous increase in market capitalization with a soaring stock market index. The Karachi Stock Exchange (KSE) share index that stood at 1,507 points at the end of the year 2000 - has crossed the level of 12,274 points on April 17, 2008 registering a growth of 64.7 percent over June 2005. Market capitalization has reached Rs. 3,027 billion (US$ 50.45 billion). In addition, settled trades, which used to be around 1% percent a few years back, are now over 15%. Following measures have caused increased and growth in capital market of Pakistan. Consistent and transparent economic policies. Successful privatization process. Sound monetary policy of the Central Bank. Maintenance of fiscal discipline. The capital market reforms introduced and adopted by the stock exchanges with full support and guidance of the apex regulator, SECP.

Foreign Portfolio Investment


Foreign portfolio investment is the entry of funds into a country where foreigners make purchases in the countrys stock and bond markets. It is a usually short term investment (sometimes less than a year, or with involvement in the management of the company), as opposed to the longer term Foreign Direct Investment partnership (possibly through joint venture), involving transfer of technology and "know-how". Moreover, foreign portfolio investment in capital market has substantially increased from Rs 76.6 billion as on December 31, 2005 to Rs 97.5 billion on September, 23rd, 2008.