Capital Market in Pakistan

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Introduction

Capital markets are key elements of a modern, market-based economic system as they serve as the channel for flow of long term financial resources from the savers of capital to the borrower’s of capital. Efficient capital markets are henceessential for economic growth and prosperity. With growing globalization of economies, the international capital markets are also becoming increasingly integrated. While such ntegration ispositive for global economic growth, the downsiderisk is the contagion effect of financial crisis, especially if its origin lies in the bigger markets. The capital market is the market for the issue and trading of long-term securities.  The term in this instance is measured as the term to maturity of the security and in order to be classified as a capital market instrument, the term to maturity should be longer than 3 years.  During the trading of these instruments, the securities traded are informally classified into short-term, medium-term and long-term securities depending on their term to maturity.  Where the term to maturity of the instrument is up to five years, the security is classified as a short-term capital market instrument.  Where the term to maturity is five to ten years, the security is classified as medium term, and where the term to maturity is more than 10 years, the security is known as long-term. The primary market is the market for the first issue of securities.   This issue is normally done by means of a public issue or by private placement.   The secondary market is the market for trading securities once they have been issued.  The secondary market has a big influence on the issues in the primary market, as the market rate is determined in the secondary market.  Issues in the primary market at below market rate, determined in the secondary market, would be issued at a discount on the nominal value of the instrument.  If the volumes traded in the secondary market are high it could be an indicator that an excess of long-term money is available in the market, and it may thus be an opportune time to issue new securities into the market by means of the primary market.  Therefore, if the liquidity in the secondary market is high, chances are that new issues would be more successful than in an illiquid market. A capital market is a market where both government and companies raise long term funds to trade securities on the bond and the stock market. It consists of both the primary market where new issues are distributed among investors, and the secondary markets where already existent securities are traded. 

In the capital market, mortgages, bonds, equities and other such investment funds are traded. The capital market also facilitates the procedure whereby investors with excess funds can channel them to investors in deficit. The capital market provides both overnight and long term funds andand uses financial instruments with long maturity periods. The following financial instruments are traded in this market: * Foreign exchange instruments

* Equity instruments
* Insurance instruments
* Credit market instruments
* Derivative instruments
* Hybrid instruments

The capital market in Pakistan is still in its infancy commensurating with the stage of economic development and transition from agricultural base to industrial based set-up.

Broadly capital market includes various institutions like Commercial Banks, Investment Banks, Leasing Companies, Modarabas and Stock Exchanges. But it specifically connotes money market operations and marketing of securities through stock exchanges.

The Stock Exchange is a formal association of agents who deal in shares and securities and execute the order of their customers on commission basis. An agent usually has an office with sufficient information sources, current quotations and advisory expertise to assist investors in making decisions. They also must know where to find the buyers and sellers for the...
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