Finance Portfolio Management: Capital Markets and Investment Analysis

This report provides a comprehensive analysis of capital markets, including the various participants such as corporations, financial analysts, institutional investors, mutual funds, hedge funds, investment banks, public accounting firms, and households. It explores the concept of information asymmetry within capital markets, discussing its impact on investment decisions and lending practices. Furthermore, the report examines the debate of whether finance is an art or a science, highlighting the analytical and theoretical aspects while acknowledging the role of judgment and experience in financial management. The paper concludes by referencing key sources in the field of finance.

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Introduction
A capital market is a virtual platform where individuals, firms and the government can
buy and sell securities (Brooks 2019, pp. 109). The two major categories of capital markets are
primary and secondary. This paper provides a summary of the various participants in capital
markets. It also analyzes how information asymmetry relates to capital markets. Furthermore, the
paper outlines assess whether finance is an art or a science.
Various Participants in Capital Markets
Capital markets have various participants. The following are some of the key participants
in the capital market.
i. Corporations/Companies
Corporations or companies require capital for the expansion and operation of their
businesses. They acquire this capital through the sale of stocks or bonds to investors.
ii. Financial Analysts
The primary role of analysts in capital markets is to examine the companies and produce
ideas and opinions concerning their value. They help investors in making financially viable
decisions on which company stock to buy.
iii. Institutional Investors
These are mostly fund managers, retail investors and institutional investors who provide
funds to companies for growth and expansion. The companies offer equity or debt to the
institutional investors in return, through the issuance of bonds and shares respectively.

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iv. Mutual Funds
A mutual fund is a particular type of institutional investor that helps in the control of risk
through hedging. Hedging is the process of purchasing one stock and then reducing the supply of
similar stock to create its demand. Hedge funds make money from the variation in the relative
performance of the stocks (Brealey, Myers, Allen and Mohanty 2012, pp. 59).
v. Sell Side (Investment Banks)
Investment banks serve as intermediaries in the capital markets. They facilitate deals
between institutions and firms. Their main job is to link corporations to institutional investors,
with crucial consideration of expected risks and returns, as well as styles of investments (Brooks
2019, pp. 112).
vi. Mutual Funds
These are types of institutional investors who help in the management of many
individuals. They help in risk control through diversification of stocks and securities.
vii. Public Accounting Firms
Public accounting firms play vital roles in capital markets. For instance, they provide
financial reporting, financial statement audits, advisory and consulting (Brigham and Houston
2012, pp. 32).
viii. Households
Households are vital capital market participants since they offer the capital which is
necessary for capital markets to operate.

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How Information Asymmetry Relate To Capital Markets
Information asymmetry is exhibited in capital markets. In capital markets, information
asymmetry occurs where one of the two participants possess more information than the other
transacting party, thus leading to the ability to make a more informed decision (Higgins and
Reimers 2015, pp. 83).
In purchase or sale of financial security, information asymmetry occurs if the seller or the
buyer has more information about the past, present or the future performance of the security in
question. If the buyer is more informed, then he knows that the stock is underpriced relative to its
aggregate performance. In case the seller has the information, he knows that the stock is
overpriced. Information asymmetry, therefore, offers the seller or the buyer a better chance to
make a financially viable investment decision and thus make a substantial profit from the sale or
purchase (Brooks 2019, pp. 128).
In lending or borrowing money, information asymmetry takes place when the borrower is
more informed about his financial state than the lender does. The lender is worried that the
borrower will potentially default on the loan. Although the lender considers assessing at the
borrower’s credit history and level of salary, he does not get a clear insight about the
creditworthiness of the borrower (Tirole 2010, pp. 204).
Is Finance An Art Or A Science?
According to Gitman, finance is both an art and a science. He defines finance as “an art
and science of managing money.” Finance is an art since in modern time, it has become more
analytical than before. There is development of new financial theories. As an art, finance allows
financial managers to examine the various alternatives that relate to the raising and managing of

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money. It allows them to formulate models that predict the outcomes derived from using any one
alternative (Clarkson 2012, pp. 364).
Finance, on the other hand, is a science. Finance is a mature science as it offers
knowledge concerning how and when a company should invest to outcompete its industry rivals.
Additionally, the new theories and models have rendered finance more scientific. However, the
financial managers cannot accurately compare the financial theories with “scientific methods”
which apply to physical sciences (Clarkson 2012, pp. 3671). R.A. Stevenson describes finance as
a “scientific art.” He describes finance as “the science of understanding how to make predictions
on financial consequences and the art of knowing the right time to act.”

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References
Brealey, R.A., Myers, S.C., Allen, F. and Mohanty, P., 2012. Principles of corporate finance.
Tata McGraw-Hill Education.
Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage
Learning.
Brooks, C., 2019. Introductory econometrics for finance. Cambridge university press.
Clarkson, P.M., 2012. Publishing: art or science? Reflections from an editorial
perspective. Accounting & Finance, 52(2), pp.359-376.
Higgins, R.C. and Reimers, M., 2015. Analysis of financial management (No. s 53). Chicago:
Irwin.
Tirole, J., 2010. The theory of corporate finance. Princeton University Press.