The document provides an overview of key concepts in finance including financial markets, institutions, and products. It discusses the roles of commercial banks, central banks, investment banks, brokers, stock exchanges, and different types of securities. The purpose of the financial system is to bring together surplus and deficit economic units. Financial markets include money markets, capital markets, and security exchanges that facilitate trading of various instruments.

1. TABLE OF CONTENTS
Sr.No. Particulars Page #
1 Financial System:
2 Financial Markets:
3 Financial Institutions:
4 Financial Intermediaries:
5 The Stock Market:
6 Securities:
7 Types of Finance Companies:
8 Insurance Companies:
Financial System:
Some economic units generate more income than they spend and have funds left
over. These are called Surplus Economic Units. Other economies units generate
less income than they spend and need to acquire additional funds in order to
sustain their operations. These are called Deficit Economic Units. The purpose of
financial system is to bring the two groups, surplus economic units and deficit
economic units, together for their mutual benefits.
Financial Markets:
• Physical Asset markets
• Spot markets
• Money markets
• Mortgage markets
• The primary market
• The secondary market
• Private markets
• The money market
• The capital market
• Security exchanges
Financial Institutions:

2. • Commercial Banks
• Savings & Loan Associations
• Central Bank
• Credit Unions
• Insurance Companies
• Mutual Funds
• Pension Funds
Financial Intermediaries:
• Investment Bankers
• Brokers
• Dealers
The Stock Market:
• Physical Location Stock Exchange
• The Over-the-Counter Market
• The NASDAQ stock market
Securities:
Securities in Money Market:
• T-Bill
• Negotiable Certificates of Deposits
• Commercial Papers
• Eurodollars
• Banker’s Acceptance
Securities in Capital markets:
• Bonds
• Treasury Notes
• Municipal Bonds
• Corporate Bonds
Types of Finance Companies:
• Consumer Finance Companies
• Commercial Finance Companies
• Sales Finance Companies
Insurance Companies:

3. • Life Insurance Companies
• Property and Casualty Insurance Companies
• Pension Funds
• Annuities
Financial Markets:
Financial Asset Markets:
Financial asset markets, on the other hand deal with stocks, bonds, notes,
mortgages and other financial instruments.
Spot Markets:
Spot markets and future markets the terms that refer to whether the assets are
being bought or sold on the spot delivery or for delivery at some future date.
Such as six months or a year in future.
Money Markets:
Are the markets for short term, highly liquid debt securities. The New York and
London money markets have long been the world’s largest markets.
Mortgage Markets:
Deals with loan and residential, commercial and industrial real estate and on
farmland.
The Primary Market:
When a security is created and sold for the first time in the financial marketplace,
the transaction takes place in the primary market. It is also known as Initial Public
Offering (IPO)
The Secondary Market:
Once a security has been issued, it may be traded from one investor to another.
The Money Market:
Short term securities are traded in money market. Network of dealers operate in
this market.
The Capital Market:

4. Long term securities traded in the capital market.
Security Exchanges:
Security exchanges facilitate trading of stock or bond among investors.
Financial Institutions:
Commercial Banks:
Commercial banks are financial institutions that exit primarily to lend money to
business. Banks also lend to individuals, government and other entities, but the
bulk of their profit typically come from business loans. Commercial banks make
money by charging a higher interest rate on the money they lend than the rate
they pay on money lent to them in the form of deposits. The difference between
the rate charged to borrowers and the rate paid to depositors is known as the
interest rate spread.
Banking is different from many other types of business in that it must have a
charter before it can open its doors. A bank charter is much more different to
obtain Ethan a city license need to open another business. It is an authorization
from the government granting permission to operate.
Commercial Bank Operations:
Commercial banks operate with more government oversight than most
businesses but they are managed just like other companies.
Value maximization of Stockholders.
Commercial banks have stockholders,employees,mnagers,equipment, facilities
and the primary financial goal of such banks is to maximize value for their
stockholders.
Receiving and Lending of Funds:
The banks do most of their business by receiving funds from depositors and
lending the funds to those who need them.
Issuance of Bonds:
Commercial banks occasionally issue long term bonds to raise funds, borrow
from the federal reserve, or borrow deposits kept by other financial institutions in
the federal reserve banks in what is known as the federal fund market.

5. Commercial Banks Reserves:
Commercial banks are not allowed to lend all the funds they get from depositors.
Central bank requires all commercial banks to keep a minimum amount of
reserves on hand.
The required level of reserves a bank must hold is determined by applying a
certain percentage to the average weekly deposits held by the bank. The exact
percentage of deposits a bank must hold in reserve, called the require reserve
ratio.
Central Bank:
THE STATE BANK OF PAKISTAN
Primary Functions
Sole Authority to Issue Notes:
One of the primary responsibilities of the State Bank is the regulation of currency
in accordance with the requirements of business and the general public. For this
purpose the Bank has been granted the sole right of issuing notes in the country
under Section 24 of the State Bank of Pakistan Act, 1956. The overall affairs with
respect to the issuing of notes are conducted through two notionally separate
departments of SBP.
T-Bill Auctions
SBP 3-day repots rate influences the yield of T-bills sold through auctions the cut
off yield is determined by the Auction Committee, keeping in view monetary
targets, Current economic and financial conditions and expected market
response. The Six month T-bill is considered the most important benchmark by
the money market.
Open Market Operation
SBP is conducting regular Open Market Operations
(OMOs) since January 1995.
Regulation and Supervision of the Financial System:
Another principal task of the Bank is to safeguard the soundness of the financial
system. To perform this crucial role effectively and efficiently, State Bank of
Pakistan has been given vast powers under the State Bank of Pakistan Act,
1956,

6. Bankers' Bank:
The Bank also functions as the bankers’ bank. Banks are classified as scheduled
and non-scheduled. The Bank maintains an updated list of all scheduled banks at
its various offices. These banks are entitled to certain facilities from the State
Bank and in return they have some obligations to it.
Lender of the Last Resort:
One of the important characteristics of a central bank is its being the lender of the
last resort. The State Bank provides loan and re-discount facilities to scheduled
banks in times of dire need when they find no other source of funds.
Banker to Government:
The State Bank conducts the banking business of Federal and Provincial
Government and some government agencies.
2 Secondary Functions:
2.1 Public Debt Management
The Bank is responsible for the management of government debt under
subsection
13(e) of section 17, and section 21 of the SBP Act, 1956.
Management of Foreign Exchange
Being responsible for maintaining the external value of the currency, the State
Bank of Pakistan assumed the charge of management and administration of the
exchange system of the country in line with the Foreign Exchange Regulation
Act,
Reports on the State of the Economy
The Bank submits its review of the economy to the Parliament through its annual
and quarterly reports.
Relationships with International Financial Institutions
Pakistan is the member of International Monetary Fund. The State Bank of
Pakistan deals with the IMF on behalf of the Government of Pakistan
3 Non-traditional Functions:
Micro Finance:

7. In order to expand the banking services at grass root level and to enable the
financial sector to play its role in poverty alleviation, the State Bank of Pakistan is
also promoting micro banking in the country.
Training Facilities to Bankers:
Keeping in view an acute shortage of trained bankers at the time of the
independence, the State Bank introduced "Bank Officers Training Scheme"
within
one month of its establishment. On July 2 1948, the Central Board of Directors of
the Bank approved a comprehensive scheme for university graduates especially
with mathematics, economics and commerce backgrounds.
Savings and Loan Associations:
Like commercial banks, savings and loan associations are in business to take in
deposits and lend money, primarily in the form of mortgage loans. Mortgage
loans are loans that are secured by real property such as real estate. If borrower
defaults on a mortgage loan, the lender can take legal possession on the
property. The property can then be sold and the lender keeps the proceeds from
the sale up to the amount owed.
S&Ls make a profit by charging a higher interest rate on the money they lend
than the rate paid on deposits they take in.
Credit Unions:
Credit unions are cooperative associations whose members are supposed to
have a common bond, such as being employees of the same firm. Member’s
savings are loans and home mortgage, credit unions are often the cheapest
source of funds available to the individual borrowers.
Mutual Funds:
Are corporations that accept money from savers and then use these stocks,
bonds, long term bonds, or short term debt instruments issued by businesses or
government units. These organizations pool funds and thus reduce risk by
diversification. They also achieve economy of scale in analyzing securities,
managing portfolios, and buying and selling securities.
Pension Funds:
Pension funds are retirement plans funded by corporations or government
agencies for their workers and administered generally by the trust departments of

8. commercial banks or by life insurance companies. Pension funds invest primarily
in bonds, stocks, mortgages and real estate.
Financial Intermediaries:
Investment Bankers
Institutions called investment banking firms exist to help business and state and
local governments sell their securities to the public.
Underwriting:
Investment bankers arrange securities sale on either an underwriting basis or
best effort basis. The term under wring refers to the process by which an
investment banker purchase all the new securities from the issuing company and
then resell them to the public.
Investment bankers who underwrite securities face some risk because
occasionally an issue is overpriced and can’t be sold to the public for the price
anticipated by the investment banker.
Brokers:
Brokers often account representative for an investment banking firm, handle
orders to buy or sell securities. Brokers are agents who work on behalf of an
investor. When investor call with an order. Brokers work on their behalf to find
someone to take the other side of the proposed trade. If investor want to buy,
brokers find sellers. If investors want to sell, broker find buyers.
Dealers:
Dealers make their living buying securities and reselling them to others. Dealers
make money by buying securities for one price, called bid price and selling them
for a higher price, called the ask (offer) price. The difference or spread between
the bid price and the ask price represents the dealer’s fee.
The Stock Market:
Physical Location Stock Exchange:
Exist physically such as Karachi Stock Exchange. Trade of securities
between buyer and seller.
The Over-the-Counter Market:

9. No fix location. Network of dealers around the world who maintain
inventories of securities for sale.
The NASDAQ stock market:
Computerized exchange of securities all over the world.
Securities:
Document that represent the right to receive funds in the future.
Securities in Money Market:
• T-Bill:
Treasury bills are considered the benchmark of safety because the have
essentially no risk
• Negotiable Certificates of Deposits:
They are simply pieces of paper that certify that you have deposited a certain
amount of money in the bank, to be paid back on a certain amount of money
in the bank.
• Commercial Papers:
A type of short term promissory note issued by large corporations with strong
credit rating.
• Eurodollars:
Euro dollar are deposited and borrowed by large institutions with good credit
rating.
• Banker’s Acceptance:
A banker’s acceptance is a short term debt instrument that is guaranteed for
payment by a commercial bank.
Securities in Capital markets:
• Bonds:

10. Bond is the promise to pay their owner a certain amount of money on some
specified date in the future.
• Treasury Notes:
When the federal government wants to borrow the money for period of more
than one year, it issues treasury notes.
• Municipal Bonds:
The bonds issued by state and local governments are known as municipal
bonds.
• Corporate Bonds:
Corporate bonds are similar as treasury notes but issued by the corporations.
Types of Finance Companies:
Consumer Finance Companies
These are some times known a small loan companies, make small loans to
consumers for car purchases, medical expenses, vacations, and the
like.interst rate charged on these types of loans a little bit higher.
Commercial Finance Companies
These firms concentrate on providing credit to other business firms.
Sales Finance Companies
These companies help to sale of some corporation.
Insurance Companies:
Life Insurance Companies:
Life insurance companies sell policies that pay the beneficiary of the insured
hen the insured person dies.
Property and Casualty Insurance Companies:

11. Property and casualty insurance companies insure against a wide range
hazards associated person and property. These include theft, weather
damage for hurricanes and earthquake.
Pension Funds:
Pension funds are set up by companies, government and unions to pay
retirement benefit to their employees. Employees generally contribute money
to the funds now in order to draw it later, on retirement.
Annuities:
Sometime the sponsor of pension funds will use the funds accumulated
during the retire person’s working year to purchase an annuity from an
insurance company.insurane companies also sell annuities to investors.