Investment banking Lecture 2

Muhammad Arif

Landscape- Techniques and Strategies

Changes that have changed the landscape of investment banking are : Emerging economies have become dynamic and increasingly safe investment opportunities. Commodities have become an asset class. Investors bankers are now arrangers, processors and distributors (rather than investors) of capital. Fund managers are under pressure to perform thanks to a shift to low cost, passive fund management. Regulation have increased Technology have commoditized large part of the financial market

Forward Looking LandscapeTechniques and Strategies

For valuing in future, investment banks have to approach by creating three macro economic scenarios First one is depressed economic scenario. Under this GDP growth would slightly reduce to 3% in 2011-13 from 3.2% in 2010. Hence in this Financial sector would be highly concentrated. Consumer confidence would decline. Regulations would increase. This would stifle entrepreneur activities. In second one the GDP growth would pick up in 2011-13 to 3.8%. Globalization and entrepreneurial activities would increase. Key trends would be deregulation and technology innovations. Technology standards would heighten degree of personalization and customization. In the third scenario the GDP growth would drop significantly to 2%. Under this entrepreneurial activities would be curtailed. Political tensions and instability would increase while innovations continues. Select areas of emerging economies would leapfrog developed economies.

Forward Looking LandscapeTechniques and Strategies

Under this landscape Investment banking services can be provided under scenarios that can be as follows Commoditized services/Investment clearing banking :- in all scenarios. Capital advisory Require strong corporate connections. Viable in all three scenarios. Developed economy middle market banking:- The middle market will remain a defensible niche even in depressed scenario. Emerging market investment banking:- There are historical reasons why emerging market banks are not effective in breaking in to global markets and why developed market banks are well positioned to take advantage of the high growth levels of developing economies

Strategies and techniques - Case of Gold Man Sash

The Goldman Sachs Group, Inc. is a bank holding company, that engages in investment banking, securities services, investment management and other financial services primarily with institutional clients. Goldman Sachs was founded in 1869, and is headquartered at 85 Broad Street, in the Lower Manhattan area of New York City. The firm has offices in all major international financial centers, and provides mergers and acquisitions advice, underwriting services, asset management, and securities services to its clients, which include corporations, governments and high net worth individuals around the world. The firm also engages in proprietary trading and private equity deals. It is a primary dealer in the United States Treasury security market. Former Goldman Sachs employees Robert Rubin and Henry Paulson served as United States Secretary of the Treasury after leaving the firm; Rubin under President Clinton and Paulson under George W. Bush.

Corporate affairs
As of 2009, Goldman Sachs employed 31,700 people worldwide.[In 2006, the firm reported earnings of US$9.34 billion and record earnings per share of $19.69.It was reported that the average total compensation per employee in 2006 was US$622,000.However, this number represents the arithmetic mean of total compensation and is highly skewed upwards as several hundred of the top earners command the majority of the Bonus Pools, leaving the median that most employees earn well below this number. In Business Week's recent release of the Best Places to Launch a Career 2008, Goldman Sachs was ranked #4 out of 119 total companies on the list. The current Chief Executive Officer is Lloyd C. Blankfein. The company ranks #1 in Annual Net Income when compared with 86 peers in the Investment Services sector. Blankfein earned a $67.9 million bonus in his first year. He chose to receive "some" cash unlike former CEO Henry Paulson, his predecessor who chose to take his bonus entirely in company stock.

Corporate affairs
Goldman Sachs expected in December 2008 to pay $14 million in taxes worldwide for 2008 compared with $6 billion the previous year. The companys effective income tax rate dropped to nearly 1 percent from 34.1 percent in 2007 due to an increase in permanent benefits as a percentage of lower earnings and changes in geographic earnings mix. Goldman Sachs is divided into three businesses units, Investment Banking, Trading and Principle Investments, and Asset Management and Securities Services.

Investment banking
Investment banking is divided into two divisions and includes Financial Advisory (mergers and acquisitions (M&A), investitures, corporate defense activities, restructuring and spin-offs) and Underwriting (public offerings and private placements of equity, equity-related and debt instruments). Goldman Sachs is one of the leading M&A advisory firms, often topping the league tables in terms of transaction size. The firm gained a reputation as a white knight in the mergers and acquisitions sector by advising clients on how to avoid hostile takeovers, moves generally viewed as unfriendly to shareholders of targeted companies. Goldman Sachs, for a long time during the 1980s, was the only major investment bank with a strict policy against helping to initiate a hostile takeover, which increased the firm's reputation immensely among sitting management teams at the time. The investment banking segment accounts for around 17 percent of Goldman Sachs' revenues. The firm has also been involved in both advising and brokering deals to privatize major highways by selling them to foreign investors. In addition to advising 4 state and local governments on privatization projects, including Indiana, Texas, and Chicago.

Trading & Principal Investments

Trading and Principal Investments is the largest of the three segments, and is the company's profit center. The segment is divided into three divisions and includes Fixed Income, Currency and Commodities (trading in interest rate and credit products, mortgage-backed securities and loans, currencies and commodities, structured and derivative products), Equities (trading in equities, equity-related products, equity derivatives, structured products and executing client trades in equities, options, and Futures contracts on world markets), and Principal Investments (merchant banking investments and funds). This segment consists of the revenues and profit gained from the Bank's trading activities, both on behalf of its clients (known as flow trading) and for its own account (known as proprietary trading).

Trading & Principal Investments

Most trading done by Goldman is not speculative, but rather an attempt to profit from bid-ask spreads in the process of acting as a market maker. On average, around 68 percent of Goldman's revenues and profits are derived from trading. Upon its IPO, Goldman predicted that this segment would not grow as fast as its Investment Banking division and would be responsible for a shrinking proportion of earnings. The opposite has been true however, resulting in now-CEO Lloyd Blankfein's appointment to President and Chief Operating Officer after John Thain's departure to run the NYSE and John L. Thornton's departure for an academic position in China.

Asset management and securities services

As the name suggests, the firm's Asset Management and Securities Services segment is divided into two components: Asset Management and Securities Services. The Asset Management division provides investment advisory and financial planning services and offers investment products (primarily through separately managed accounts and commingled vehicles) across all major asset classes to a diverse group of institutions and individuals worldwide. The unit primarily generates revenues in the form of management and incentive fees. The Securities Services division provides clearing, financing, custody, securities lending, and reporting services to institutional clients, including hedge funds, mutual funds, and pension funds. The division generates revenues primarily in the form of interest rate spreads or fees. In 2006, the Goldman Sachs Asset Management hedge fund was the 9th largest in the United States, with $20.58 billion under management. This was down from $32.5 billion in 2007, after client redemptions and weaker investment performance.

GS Capital Partners
GS Capital Partners is the private equity arm of Goldman Sachs. It has invested over $17 billion in the 20 years from 1986 to 2006. One of the most prominent funds is the GS Capital Partners V fund, which comprises over $8.5 billion of equity. On April 23, 2007, Goldman closed GS Capital Partners VI with $20 billion in committed capital, $11 billion from qualified institutional and high net worth clients and $9 billion from the firm and its employees. GS Capital Partners VI is the current primary investment vehicle for Goldman Sachs to make large, privately negotiated equity investments.

Goldman Sachs criticism

In 1986, David Brown was convicted of passing inside information to Ivan Boesky on a takeover deal. Robert Freeman, who was a senior Partner, the Head of Risk Arbitrage, and a protg of Robert Rubin, was also convicted of insider trading, for his own account and for the firm's. On November 11, 2008, the Los Angeles Times reported that Goldman Sachs, which earned $25 M from underwriting California bonds, had advised other clients to "short" those bonds. Shorting is essentially betting that the state will default on the bonds, which serves to drive up the cost of the issue to the state. While some journalists criticized the contradictory actions, others pointed out that the opposite investment decisions undertaken by the underwriting side and the trading side of the bank were normal and in line with regulations regarding Chinese walls.

Goldman Sachs criticism

During 2008 Goldman Sachs came under criticism for an apparent revolving-door relationship in which its employees and consultants have moved in and out of powerful US Government positions, where there may exist the potential for a conflict of interest. Former Treasury Secretary Hank Paulson was a former CEO of Goldman Sachs. Additional controversy attended the selection of former Goldman Sachs lobbyist Mark Patterson as chief of staff to Treasury Secretary Geithner, despite President Barack Obama's pledge to limit the influence of lobbyists in his administration.

Involvement with the bailout of AIG

American International Group was bailed out by the US government in September 2008 after suffering a liquidity crisis, whereby the Federal Reserve initially lent $85 billion USD to AIG to allow the firm to meet its collateral and cash obligations. In March 2009 it was reported that in 2008, Goldman Sachs, alongside other major US and international financial institutions, had received billions of dollars during the unwind of credit default swap (CDS) contracts purchased from AIG, including $12.9bn from funds provided by the US Federal Reserve to bail out AIG. (As of April, 2009, US Government loans to AIG totaled over $180 billion.) The money was owed to counterparties under legally-binding contracts purchased from AIG. However, due to the size and nature of the payouts there was considerable controversy in the media and amongst some politicians as to whether banks, including Goldman Sachs, may have benefited materially from the bailout and if they had been overpaid. The New York State Attorney General Andrew Cuomo announced in March 2009 that he was investigating whether AIG's trading counterparties improperly received government money.

Firm's response to criticism of AIG payments

Goldman Sachs has maintained that its net exposure to AIG was 'not material', and that the firm was protected by hedges (in the form of credit default swaps with other counterparties) and USD 7.5B of collateral.[The firm stated the cost of these hedges to be over USD 100M. According to Goldman, both the collateral and credit default swaps would have protected the bank from incurring an economic loss in the event of an AIG bankruptcy (however, because AIG was bailed out and not allowed to fail, these hedges did not pay out.)CFO David Viniar stated that profits related to AIG in Q1 2009 "rounded to zero", and profits in December were not significant. He went on to say that he was "mystified" by the interest the government and investors have shown in the bank's trading relationship with AIG. However, there is considerable speculation that Goldman's hedges against their AIG exposure would not have paid out if AIG was allowed to fail. According to a report by the United States Office, if AIG had collapsed, it would have made it difficult for Goldman to liquidate its trading positions with AIG, even at discounts, and it also would have put pressure on other counterparties that "might have made it difficult for Goldman Sachs to collect on the credit protection it had purchased against an AIG default." Finally, the report said, an AIG default would have forced Goldman Sachs to bear the risk of declines in the value of billions of dollars in collateralized debt obligations.

Firm's response to criticism of AIG payments

Goldman argues that credit default swaps are marked to market (i.e. valued at their current market price) and their positions netted between counterparties daily. Thus, as the cost of insuring AIG's obligations against default rose substantially in the lead-up to its bailout, the sellers of the CDS contracts had to post more collateral to Goldman Sachs. Thus, the firm claims its hedges were effective and the firm would have been protected against an AIG bankruptcy and the risk of knock-on defaults, had AIG been allowed to fail. However, in practice, the collateral would not protect fully against losses both because protection sellers would not be required to post collateral that covered the complete loss during a bankruptcy and because the value of the collateral would be highly uncertain following the repercussions of an AIG bankruptcy.

Financial Markets
In economics, a financial market is a mechanism that allows people to buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient-market hypothesis. Financial markets have evolved significantly over several hundred years and are undergoing constant innovation to improve liquidity. Both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded) exist. Markets work by placing many interested buyers and sellers in one "place", thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy.

Financial Markets
In finance, financial markets facilitate: The management of interest rate (Money Market) The raising of capital (in the capital markets) The transfer of risk (in the derivatives markets) International trade (in the currency markets) and are used to match those who want capital to those who have it. Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends. In mathematical finance, the concept of a financial market is defined in terms of a continuous-time Brownian motion stochastic process.

Types of financial markets

The financial markets can be divided into different subtypes: Capital markets which consist of:
Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof.

Commodity markets, which facilitate the trading of commodities. Money markets, which provide short term debt financing and investment.

Types of financial markets

Derivatives markets, which provide instruments for the management of financial risk.
Futures markets, which provide standardized forward contracts for trading products at some future date; see also forward market.

Insurance markets, which facilitate redistribution of various risks. .

the

Types of financial markets

Foreign exchange markets, which facilitate the trading of foreign exchange. The capital and Money markets consist of primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets. Secondary markets allow investors to sell securities that they hold or buy existing securities

Raising capital or Capital formation

To understand financial markets, let us look at what they are used for, i.e. what is their purpose? Without financial markets, borrowers would have difficulty finding lenders themselves. Intermediaries such as banks help in this process. Banks take deposits from those who have money to save. They can then lend money from this pool of deposited money to those who seek to borrow. Banks popularly lend money in the form of loans and mortgages. More complex transactions than a simple bank deposit require markets where lenders and their agents can meet borrowers and their agents, and where existing borrowing or lending commitments can be sold on to other parties. A good example of a financial market is a stock exchange. A company can raise money by selling shares to investors and its existing shares can be bought or sold. The table on the next slide illustrates where financial markets fit in the relationship between lenders and borrowers

Financial markets- Relationship

Lenders
Individuals Many individuals are not aware that they are lenders, but almost everybody does lend money in many ways. A person lends money when he or she: puts money in a savings account at a bank; contributes to a pension plan; pays premiums to an insurance company; invests in government bonds; or invests in company shares. Companies Companies tend to be borrowers of capital. When companies have surplus cash that is not needed for a short period of time, they may seek to make money from their cash surplus by lending it via short term markets called money markets. There are a few companies that have very strong cash flows. These companies tend to be lenders rather than borrowers. Such companies may decide to return cash to lenders (e.g. via a share buyback.) Alternatively, they may seek to make more money on their cash by lending it (e.g. investing in bonds and stocks.)

Financial markets- Relationship

Borrowers Individuals borrow money via bankers' loans for short term needs or longer term mortgages to help finance a house purchase. Companies borrow money to aid short term or long term cash flows. They also borrow to fund modernization or future business expansion. Governments often find their spending requirements exceed their tax revenues. To make up this difference, they need to borrow. Governments also borrow on behalf of nationalized industries, municipalities, local authorities and other public sector bodies. In the UK, the total borrowing requirement is often referred to as the Public sector net cash requirement (PSNCR). Governments borrow by issuing bonds. In the UK, the government also borrows from individuals by offering bank accounts and Premium Bonds. Government debt seems to be permanent. Indeed the debt seemingly expands rather than being paid off. One strategy used by governments to reduce the value of the debt is to influence inflation.

Financial markets- Relationship

Municipalities and local authorities may borrow in their own name as well as receiving funding from national governments. In the UK, this would cover an authority like Hampshire County Council. Public Corporations typically include nationalized industries. These may include the postal services, railway companies and utility companies. Many borrowers have difficulty raising money locally. They need to borrow internationally with the aid of Foreign exchange markets.

Financial markets- Relationship

Derivative products During the 1980s and 1990s, a major growth sector in financial markets is the trade in so called derivative products, or derivatives for short. In the financial markets, stock prices, bond prices, currency rates, interest rates and dividends go up and down, creating risk. Derivative products are financial products which are used to control risk or paradoxically exploit risk. It is also called financial economics. Currency markets Seemingly, the most obvious buyers and sellers of currency are importers and exporters of goods. While this may have been true in the distant past, when international trade created the demand for currency markets, importers and exporters now represent only 1/32 of foreign exchange dealing, according to the Bank for International Settlements. The picture of foreign currency transactions today shows: Banks/Institutions Speculators Government spending (for example, military bases abroad) Importers/Exporters Tourists

Analysis of financial markets

Much effort has gone into the study of financial markets and how prices vary with time. Charles Dow, one of the founders of Dow Jones & Company and The Wall Street Journal, enunciated a set of ideas on the subject which are now called Dow Theory. This is the basis of the so-called technical analysis method of attempting to predict future changes. One of the tenets of "technical analysis" is that market trends give an indication of the future, at least in the short term. The claims of the technical analysts are disputed by many academics, who claim that the evidence points rather to the random walk hypothesis, which states that the next change is not correlated to the last change.

Analysis of financial markets

The scale of changes in price over some unit of time is called the volatility. It was discovered by Benot Mandelbrot. The scale of change, or volatility, depends on the length of the time unit to a power a bit more than 1/2. Large changes up or down are more likely than what one would calculate using a Gaussian distribution with an estimated standard deviation. A new area of concern is the proper analysis of international market effects. As connected as today's global financial markets are, it is important to realize the there are both benefits and consequences to a global financial network. As new opportunities appear due to integration, so do the possibilities of contagion. This presents unique issues when attempting to analyze markets, as a problem can ripple through the entire connected global network very quickly. For example, a bank failure in one country can spread quickly to others, which proper analysis more difficult.

Money Market
In general terms, the money market is the market where liquid and short-term borrowing and lending take place. The lending of funds in this market constitutes short-term investments. In a certain sense all bank notes, current accounts, cheque accounts, etc. belong to the money market. In financial market terms, the money market exists for the purpose of issuing and trading of short-term instruments, that is, instruments where the term remaining from the date when trading takes place to the date of redemption of the loan represented by die instrument (commonly referred to as the "term to maturity"), is of a short-term nature. In theory, this term for classification as a money market instrument is given as one year. In practice, however in some countries instruments with a term to maturity of three years or less are normally classified as money market instruments although this is not a hard and fast rule.

Money Market Trading

Money market instruments are not traded through an exchange, but by means of informal telephone trading and OTC (over the counter) trading. The money market is probably the most informal market in Pakistan and does not use screen or electronic trading at this stage. E Bond trading recently introduced may change the system in the time to come Physical trading documents and settlement procedures are still used in this market. The rates at which these instruments are issued and traded are quoted by the financial institutions in form of KIBOR/PKRV via Reuters and can be seen on a computer screen which is linked to one of the participating systems.

MM-Institutions in the market

There are quite a few active institutions in the market, and it probably has the most active participants of all the financial markets. Individuals form an important and integral part of the market through cash income and spending, investments and borrowings at banks and funds (e.g. unit trusts, pension funds, etc.) and other short-term funds, which they invest and borrow. The main players in the market are banks and primary Dealers appointed by the SBP to acquire T-bill/PIB/Sukuk through auctions The government is involved in the market through the MOF and the SBP. They interact with other players in the market such as the commercial banks, the merchant banks, the funds and corporate companies. Other financial institutions such as insurers, money market trusts, micro-lenders, etc. all play a part to keep the money market vibrant and liquid.

Money Market-Instruments
There are basically two types of instruments issued and traded in the money market, namely: Instruments which pay interest on the amount invested, where the interest is normally paid to the holder of the instrument (the lender), together with the redemption amount at redemption date. Interim interest payments may be made in certain cases. These instruments are called interest instruments. Instruments in this category include: Negotiable certificates of deposit (NCDs) Short-term government stock Interest rate instruments issued by the private sector, with terms to maturity of three to eight years. Instruments that do not pay interest on the amount invested but are issued at a discount on the nominal value (the redemption amount). These instruments are called discount instruments. Instruments in this category include: Bankers' acceptances (BAs) Treasury bills (TBs) Commercial paper

Money Market Instruments

Negotiable certificates of deposit (NCDs) A negotiable certificate of deposit is a certificate issued by a bank for a deposit made at the bank. This deposit attracts a fixed rate of interest, which is normally payable to the holder of the instrument together with the nominal amount invested, at redemption date. NCDs are bearer documents which means that the name of the owner (holder or depositor) does not appear on the document. The bearer or holder of the document will receive the maturity value (the amount deposited plus interest) at maturity date.

Money Market Instruments

Government stock and other short-term interest rate instruments Government stock and other private sector instruments are normally issued for long-term periods with more than one interest payment before redemption. Where the term to redemption of a government stock or other interest rate instrument has moved into the money market category, and there is just one interest payment left, which falls on the same date as the redemption payment, the same falls in the money market category.

Money Market Instruments

A bankers' acceptance (BA) was invented to suit the needs of a party requiring temporary finance to facilitate the trading of specific goods. The party needing finance would approach investors for this temporary finance. The investors or lenders would then lend a certain amount to the borrower in exchange for a document stating that the debt would be paid back on a certain date in the short-term future. For this arrangement to be attractive to the lender, the amount paid back by the borrower (called the nominal amount) would have to be more than the amount advanced by the lender. The difference between the amount advanced and the amount paid back (the nominal amount) is known as the discount on the nominal amount. The two parties would normally be brought together by a bank. The redemption of the loan would have to be guaranteed by a bank, called the acceptance by the bank making the arrangement or named as "bankers' acceptance".

Money Market Instruments

The holder of the document i.e. BA may, at the redemption date approach the bank who will pay the nominal amount to the holder. The bank will then claim the nominal amount from the borrower. A bank acceptance can, in formal terms, be described as an unconditional order in writing addressed and signed by a drawer (the lender) to a bank which signs the document and becomes the acceptor promising to pay a certain amount of money at a fixed date in the future to the bearer or holder (the borrower) of the document (the acceptance).

Money Market Instruments

Treasury bills The government issues treasury bills .They are discount instruments issued for the short term, similar to BAs. The issue and redemption of these instruments are handled by the SBP as depository on behalf of the government. Treasury bills are issued through auction held on fortnightly basis in 3, 6 and 12 month tenors to the appointed primary dealers who further distribute them to the end investors. The bearer or holder of the instrument may present it for payment of the nominal amount at redemption date. SBP would pay this amount into the holder's Subsidiary General Ledger account maintained with a bank on the redemption date. Tenders are submitted by parties in percentage form to two decimals at discount to Rs 100 treated as par value. The auctions are held on at mutipriced basis i.e. bidders are due to get the amount at rate quoted by them on acceptance from SBP.

Money Market Instruments

Commercial paper and other discount instruments Commercial paper refers to short-term unsecured promissory notes normally issued by the corporate companies with a high credit rating. These instruments are also issued on a discount basis such as BAs. Because they are unsecured, the risk involved will be higher than that of BAs, and therefore the issuing institution must be financially strong and sound. Because of the risk attached to these instruments they would normally be issued and traded at a higher discount than the prevailing BA rate. In Pakistan they can be issued in tenors of 3, 6 and 9 months Finance can be obtained by making use of various alternative kinds of discount instruments. Other discount instruments that have been used in the international market are secured promissory notes and asset backed commercial papers.

 Money market in Pakistan can be segregated in to clean/call transaction or Repo transactions or transactions done on outright basis Call transactions refer to transactions within banking institutions without using any collateral. Clean transactions are placement of deposits with non bank financial institutions like investment banks. Repo is a collateralized transaction for raising of funds for a short period. Outright transaction is sale and purchase of governmnet securities or any other debt securities in the market. For pricing these transactions KIBOR rates and PKRV rates appearing on Reuters on daily basis are used. KIBOR are the rates quoted by the banks against call transactions. The tenors of KIBOR are one week to 3 years. PKRV rates are revaluations rates used in the market to price Repo or outright transaction. These rates are quoted by the brokerage firms.

Segregation of Money Market in Pakistan

Capital market
It 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, as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt). Financial regulators, such as the UK's Financial Services Authority (FSA) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties. In Pakistan SECP is responsible to regulate this market Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere.

Capital market-Equity
Funds in capital market are raised through equity which is the residual claim or interest of the most junior class of investors in an asset, after all liabilities are paid. If valuations placed on assets do not exceed liabilities, negative equity exists. In an accounting context, Shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the remaining interest in assets of a company, spread among individual shareholders of common or preferred stock. The common stock or capital stock of a business entity represents the original capital paid or invested into the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors. Stock is distinct from the property and the assets of a business which may fluctuate in quantity and value.

Capital market-Equity
Preferred stock, also called preferred shares, preference shares, or simply preferred, is a special equity security that resembles properties of both an equity and a debt instrument and generally considered a hybrid instrument. Preferred are senior (i.e. higher ranking) to common stock, but are subordinate to bonds. Preferred stock usually carries no voting rights, but may carry priority over common stock in the payment of dividends and upon liquidation. Preferred stock may carry a dividend that is paid out prior to any dividends being paid to common stock holders. Capital market in Pakistan is comprised of three stock exchanges and is regulated by the SECP.

Capital market-Debt
Debt is that which is owed; usually referencing assets owed, but the term can also cover moral obligations and other interactions not requiring money. In the case of assets, debt is a means of using future purchasing power in the present before a summation has been earned. Some companies and corporations use debt as a part of their overall corporate finance strategy. In Pakistan the main instruments in this regard are TFCs and Pakistan Investment Bonds and Sukuk issued by the GOP