Suppliers and Demanders of Funds

Key participants or rather suppliers and demanders of funds in the financial markets are
individuals, businesses, and government. firms and government

Government
Governments are typically net demanders of funds. They typically borrow more than they
save. This is because of the need to finance State and local projects & operations.

Business
Business firms are are also net demanders of funds. They typically borrow more than they
save. The borrowing can be attributed to Investments in production of goods and services.

Individuals
Individuals as a group are the net suppliers of funds for financial institutions (They save more
than borrow). Some are neede of loans to finance house, auto, among others. The individuals
are therefore Typically the net suppliers of funds.

The Investment Process

The investment process involves the financial institutions (banks, savings and loans, savings
banks, credit unions, insurance companies, pension funds) actively participate in the financial
markets as both suppliers and demanders of funds.

The financial markets (Money and capital markets) act as forums in which suppliers of
funds and demanders of funds can transact business directly.

What are Financial Institutions?

Financial institutions serve as intermediaries between those who have capital to invest or lend
and those who need funds, facilitating economic activity by enabling savings, investments,
and efficient allocation of resources.

Financial institutions are categorized into a variety of types including banks, credit unions,
insurance companies, and investment companies, each offering distinct services like deposits,
loans, investments, and risk management products.

The Role of Financial Institutions in Capital Markets

Capital markets are important for functioning capitalist economies because they channel
savings and investments between suppliers and those in need. Suppliers are people or
institutions with capital to lend or invest. Suppliers typically include banks and investors.
Those seeking capital are businesses, governments, and individuals.
Financial institutions direct capital to where it is most needed in capital markets. A bank
collects deposits from customers and lends the money to borrowers, facilitating efficiency in
those markets.

Financial Institution Regulations and Oversight

Governments regulate financial institutions because they are crucial to the economy.
Bankruptcies of financial institutions, for instance, can create panic. Federal and state
agencies can regulate financial institutions such as State Bank of Pakistan and SECP ets.

Financial Instruments or Securities

Financial instruments are assets that can be traded or exchanged. Some examples of financial
instruments include stock shares, exchange-traded funds (ETFs), bonds, certificates of
deposit (CDs), mutual funds, loans, and derivatives contracts.

Types of Financial Instruments

Financial instruments may be divided into two types: cash instruments and derivative
instruments.

Cash Instruments

 The values of cash instruments are directly influenced and determined by the markets
and can be readily brought and sold. Stocks and bonds are examples of such primary
instruments.

 Cash instruments may also be deposits and loans agreed upon by borrowers
and lenders. Checks are an example of a cash instrument because they transmit
payment from one bank account to another.

Derivative Instruments

 The value and characteristics of derivative instruments are based on the vehicle’s
underlying components, such as assets, interest rates, or indices.

 An equity options contract—such as a call option on a particular stock, for

example—is a derivative because it derives its value from the underlying shares. The
call option gives the right, but not the obligation, to buy shares of the stock at a
specified price and by a certain date. As the price of the underlying stock rises and
falls, so does the value of the option, although not necessarily by the same percentage.

 There are over-the-counter (OTC) derivatives and exchange-traded derivatives. OTC

is a market or process where securities not listed on formal exchanges are priced and
traded.
Types of Asset Classes of Financial Instruments

Financial instruments may also be divided according to an asset class, which depends on
whether they are debt-based or equity-based.

Debt-Based Financial Instruments

Debt-based instruments are essentially loans made by an investor to the issuer in return for a
payment of interest.

Short-term debt-based financial instruments last for one year or less. Securities of this kind
come in the form of Treasury bills (T-bills), commercial paper, bonds, treasury bonds,
notes, debentures and skuks ets. Bank deposits and certificates of deposit (CDs) are
technically debt-based instruments because they earn interest payments.

Exchange-traded derivatives are traded for short-term, debt-based financial instruments such
as short-dated interest rate futures. There also are OTC derivatives such as forward rate
agreements.

Long-Term Debt Instruments

Long-term debt-based financial instruments last for more than a year. Long-term debt
securities are typically issued as bonds or mortgage-backed securities. Exchange-traded
derivatives on these instruments are traded as fixed-income futures and options.

OTC derivatives on long-term debts include interest rate swaps, interest rate caps and floors,
and long-dated interest rate options.

Equity-Based Financial Instruments

Equity-based instruments represent ownership of an asset.

Stocks are equity-based instruments, as are ETFs and mutual funds that are invested in
stocks. Exchange-traded derivatives in this category include stock options and equity futures.

Foreign Exchange Instruments

Foreign exchange instruments include derivatives such as forwards, futures,

options on currency pairs, and contracts for difference.

Currency swaps are another common form of forex instrument.

In addition, forex traders may engage in spot transactions for the immediate conversion of
one currency into another.
What Are Stocks?

A stock is a security that represents ownership of a fraction of the corporation that issued it.
Units of stock are called shares and entitle the owner to a portion of the corporation’s profits
equal to the number of shares owned.

Common and Preferred Stock

Common stockholders are the true owners of the company and sometimes referred to
as ordinary shares. This stock class entitles investors to generated profits, usually paid
in dividends. Common stockholders elect a company's board of directors and vote on
corporate policies. Holders of this stock class have rights to a company's assets in a
liquidation event, but only after preferred stock shareholders and other debt holders have
been paid. Company founders and employees typically receive common stock.

On the other hand, preferred stock, or preference shares, entitles the holder to regular
dividend payments before dividends are issued to common shareholders. As mentioned
above, preferred shareholders also get repaid first if the company dissolves or
enters bankruptcy. Preferred stock doesn't carry voting rights and suits investors seeking
reliable passive income.

Types of Preferred Stocks

There are four main types of preference shares: cumulative, non-cumulative, participating,
and convertible, each with distinct features affecting dividends and shareholder rights.

1. Cumulative Preferred Stock requires the company to pay all past and present dividends
to these shareholders before common shareholders. These dividend payments are guaranteed,
they might not be paid on time. Unpaid dividends are assigned as "dividends in arrears" and
must legally go to the current owner of the stock at the time of payment. At times, additional
compensation (interest) is awarded to the holder of this type of preferred stock.

Quarterly Dividend = [(Dividend Rate) x (Par Value)] ÷ 4

Cumulative Dividends per share = Quarterly Dividend x Number of Missed Payments

2. Non-cumulative Preferred Stockholders have no claim to unpaid or omitted dividends. If

the company chooses not to pay dividends in any given year, the shareholders of the non-
cumulative preferred stock have no right or power to claim such forgone dividends at any
time in the future.

3. Convertible Preferred Stock lets shareholders change their shares into common shares
after a certain date. Under normal circumstances, convertible preferred shares are exchanged
in this way at the shareholder's request. However, a company may have a provision on such
shares that allows the shareholders or the issuer to force the issue.
4. Participating Preferred stockholders can receive the standard dividends plus extra,
depending on specific conditions. This additional dividend is typically designed to be paid
out only if the amount of dividends received by common shareholders is greater than a
predetermined per-share amount. If the company is liquidated, participating preferred
shareholders may also have the right to be repaid the purchase price of the stock, as well as a
pro rata share of the remaining proceeds received by common shareholders.

What You Need to Know About IPO Stocks

When a company goes public, it issues stock through an initial public offering (IPO). IPO
stock typically gets allocated at a discount before the company's stock lists on the stock
exchange. It may also have a vesting schedule to prevent investors from selling all of their
shares when the stock commences trading. Market commentators also use the term "IPO
stocks" when referring to recently listed stocks.

Bonds

The bond is the most common type of debt instrument used by private corporations and by
governments. It serves as an IOU between the issuer and an investor. An investor loans a sum
of money in return for the promise of repayment at the specified maturity date. Usually, the
investor also receives periodic interest payments over the duration of the bond's term.

A Putable bond is a bond that allows the bondholder to force the issuer to repurchase the
security at specified dates before maturity.

Similarly, Callable bonds allow bond issuers to repurchase a bond before it matures.

Debentures

In a sense, all debentures are bonds, but not all bonds are debentures. Whenever a bond is
unsecured, it can be referred to as a debenture.

Debentures generally have a more specific purpose than other bonds. While both are used to
raise capital, debentures typically are issued to raise capital to meet the expenses of an
upcoming project or to pay for a planned expansion in business. These debt securities are a
common form of long-term financing taken out by corporations.

What Are Financial Markets

Financial markets are any marketplace where stocks, bonds, and other investments are traded.
Financial markets are an important part of the economy as they match buyers and sellers to
promote investment activity. Because of broader potential systematic risk in these types of
markets, they can be highly regulated.
Types of Financial Markets According to Issuance

1. Primary Markets

The market in which new issues of financial instruments/ securities are sold initially.

2. Secondary Markets

A market for buying and selling securities in the period between their issue and maturity. A
liquid secondary market enhances the attractiveness of financial instruments/securities to
investors.

Types of Financial Markets According to Maturity

1. Money Market

Money Market is a financial market in which only short-term debt instruments (maturity less
than one year) are traded. MM is for transactions in wholesale short term loans and deposits
and for trading short term financial instruments. Major players in the money market are:

 Central Bank And Government

 Primary Dealers/Market Makers
 Banks
 Non-bank financial Institution
 Money Market Funds & Corporate
 Money Market Brokers

2. Capital Markets

Capital market is for long-term assets, such as Treasury bonds, private debt securities (bonds and
debentures) and equities (shares). Main purpose of the capital market is to facilitate the raising of
long-term funds. Main issuers raising funds in the capital market are the Government, banks and
private companies, while the main investors are pension and provident funds and insurance
companies.