Financial Markets and its

instruments according to its

classifications
Lecture-2
Prepared by Naeemullah Amani
Investment Alternatives
• You can do investment in two types of Assets
Assets: are things that people own

Assets

Financial Assets Real Assets

e.g. Stocks and Bonds e.g. Land
Financial Assets vs Real Assets
• Financial Assets: also called financial securities or just securities, they
are non-physical cant be touched. They are normally bought and sold
via stock market e.g. Stocks and Bonds etc…

• Real Assets: are physical assets that have an intrinsic worth due to
their substance and properties. Real assets include precious metals,
commodities, real estate, land, equipment, and natural resources.
Financial Markets
• These financial assets are being traded in Financial Markets either in
Money market or capital market.

Financial Markets

Money Market Capital Market

Money Market Instruments/Securities
• Money Market: Money Market is that type of Financial market where
securities are traded for short-time-period, normally less than a year.
1. Treasury Bill:
• Treasury bills are also known as T-bills.
• This is one of the safest security to invest.
• Treasury bills are issued when the government needs money for a short time
period.
• T-bills are also called zero-coupon bonds.
 Types of T-bills

91 182 364
days days days

As per the government needs they can issue either type of bonds to
borrow money for government expenditures.
2. Commercial papers
• Commercial papers are unsecured form of promissory notes (issued
by corporations that pay a fixed rate of interest.
• It is typically issued by large banks or corporations to cover short-term
financial obligations, such as funding for a new project.
• Maturities period:
• Minimum period – 7 days
• Maximum period – 1 year
• A corporate would be eligible to issue CP if tangible net worth not less
than 4 crore or 40 millions
3. Certificate of deposit
• CDs are issued by banks and financial institutions
• Maturity period
• Minimum period – 7 days
• Maximum period – 1 year
• Certificates of deposit are CDs with a minimum face value of
$100,000. They are guaranteed by banks, cannot be redeemed before
their maturation date, and can usually be sold in highly liquid
secondary markets. Along with U.S. Treasury bills, they are considered
a low-risk, low-interest security.
4. Cash Management Bills
• Cash management bills are issued by central government to meet
immediate cash needs.
• Cash management bills (CMB) are very short-term debt instruments
with maturities that range from 7 to 50 days, although maturities of
up to 3 months is not rare.
• CMBs are issued at a discount value an redeem at face value or Par
value.
5. Call Money
• Call money is any type of short-term, interest-earning financial loan
that the borrower has to pay back immediately whenever the lender
demands it. Call money allows banks to earn interest, known as the
call loan rate, on their surplus funds. Call money is typically used by
banks for short-term funding needs like Liquidity.
• It only availed for 1 day or 1-14 days normally.
Notice money: if banks need money for more than 1 day then it is
called notice money.
Term money: if banks need funds for more than 14 days then it is called
term money.
Capital Market instruments/securities

• Capital Market: A capital market is a financial market in which long-

term debt or equity-backed securities are bought and sold.
1. Bonds
• Bonds refer to high-security debt instruments that enable an entity
to raise funds and fulfil capital requirements.
• It is a category of debt that borrowers avail from individual investors
for a specified tenure. ... Issuers extend a percentage of the principal
amount as periodical interest at fixed or adjustable rates.
Bonds vs Debentures
• Bonds are a kind of Debt-instrument which are backed up by specific
physical assets and are issued with the intention of raising Capital
through borrowings. Debentures, on the other hand, is not backed up
by any assets or security, rather it's issued only by the issuer's
promise.
2. Stocks/shares
• A stock (also known as equity) is a security that represents the
ownership of a fraction of a corporation. This entitles the owner of
the stock to a proportion of the corporation's assets and profits equal
to how much stock they own. Units of stock are called "shares."
Bonds vs Stocks
• Stocks give you partial ownership in a corporation, while bonds are a
loan from you to a company or government. The biggest difference
between them is how they generate profit: stocks must appreciate in
value and be sold later on the stock market, while most bonds pay
fixed interest over time.
Are bonds safer than stocks?

• Bonds tend to be less volatile and less risky than stocks, and when
held to maturity can offer more stable and consistent returns. Interest
rates on bonds often tend to be higher than savings rates at banks, on
CDs, or in money market accounts.
3. Preferred Stocks
• A preferred stock is a class of stock that is granted certain rights that
differ from common stock. Namely, preferred stock often possesses
higher dividend payments, and a higher claim to assets in the event of
liquidation.
• It is also called a hybrid instrument.
Preferred Stock Vs Common stock
•
The main difference between preferred and common stock is
that preferred stock gives no voting rights to shareholders while
common stock does.
• Preferred shareholders have priority over a company's income,
meaning they are paid dividends before common shareholders.
Capital market consists of two types i.e. Primary and Secondary.

• Primary Market: Primary market is the market for new shares or

securities.
• Secondary Market: Secondary market deals with the exchange of
prevailing or previously-issued securities among investors.
Which is a Better Investment?
Money Market oR Capital Market
• The best place to invest “depends on your goal and your time
horizon,” says Johnson. For investors with a long time horizon, such
as a twenty-something saving for retirement, the capital market is the
better pick.
Note:Robert Johnson, professor of finance at Heider College of Business, Creighton University, and
the co-author of “Investment Banking for Dummies.”

• “If you need that money within a year or two, it’s best to just put it in
the money market because of that volatility,” Johnson recommends.
The money market is a lower risk. “People who invest in the money
market can sleep well. There’s very little volatility but very little
growth,” says Johnson.