Report on Financial Markets, Instruments, and Capital Allocation

This report provides a comprehensive overview of financial markets and instruments, detailing key components such as bonds, shares, currencies, and equities. It identifies the main players in the financial market, including investors, intermediaries, and regulatory bodies, and explains the financial processes involved in various markets like stock, money, capital, commodity, derivatives, and foreign exchange. The report also examines capital allocation within domestic and international economies, highlighting methods such as share repurchasing, dividend payments, and debt reduction. Furthermore, it evaluates the BRICS emerging economies, discussing opportunities, threats, push and pull factors, and challenges related to industrialization and trade policies, including unsuitable technology, pollution, wealth disparities, restrictive policies, and social disadvantages. The report concludes by emphasizing the importance of efficient financial markets and effective capital allocation for economic growth.

Executive summary
An efficient and competitive financial market has in place stable financial instruments, which
are assets that can be traded and they include; bonds, shares, currencies, and others. The
market also has key players such as the investors, intermediaries and regulatory bodies. Their
main aim is to trade is carried out, and the market also grows. The financial processes in most
financial markets have been made effective and efficient with the availability of the financial
instruments and the key players. Capital allocation is another operation that ensures trade is
carried out effectively as discussed in the paper. To add to this, emerging market economies
and industrialization is also critically discussed.

Contents
Executive summary....................................................................................................................1
Introduction................................................................................................................................1
Financial marketplace.............................................................................................................1
Main financial instruments.....................................................................................................2
Types of main financial instruments...................................................................................2
Key players in the financial market........................................................................................3
Financial processes.................................................................................................................4
Allocation of capital within a domestic economy..................................................................6
Allocation of capital within the international market.............................................................7
Evaluation of BRICS emerging economy..............................................................................8
Opportunities......................................................................................................................9
Threats................................................................................................................................9
Push factors that make the emerging market attractive....................................................10
Pull factors that make the emerging market attractive.....................................................10
Challenges country faces due to industrialization and trade policies...................................11
Unsuitable technology......................................................................................................11
Pollution............................................................................................................................11
Increased disparities in wealth distribution......................................................................11
Restrictive policies............................................................................................................12
Social disadvantages.........................................................................................................12
Conclusion................................................................................................................................12
References................................................................................................................................14

Introduction
The report mainly highlights the financial market and market places, the financial instruments
used in the capital market such as bond and currencies. The key player involved in the trade
are also discussed, the financial processes as they take place in the various financial market
and capital allocation, both in domestic and international markets. The emerging economy
and industrialization are also discussed in detail.
Financial marketplace
The financial market involves the trade of securities such as; precious metal, stocks,
currencies, equities, and bonds, as well as derivatives which includes options and futures.
Both transactions are carried out at a low cost. Financial marketplace, therefore, is a place
where people engage in the trade of futures, options, currency, and stock at a low cost of the
transaction. The market is also known as the capital market because it involves a lot of
businesses that are carried out under the financial market. Most investors get into the market
to make more money, and to also grow their business (Segal, Shaliastovich, and Yaron,2015)
the capital market offers a great opportunity for most businesses to grow fast. However, the
market varies in size; some of them are small while others are big, an example of the biggest
financial market is the New York Stock Exchange (NYSE).
Main financial instruments
These are assets which can be traded or act as a form of monetary contract between parties
involved in a trade. They can be informed of cash which in financial term is currency, shares
which is an evidence of ownership of an entity interest or a bond being the contractual right
for the trader to either receive cash or provide it. Therefore, the financial instrument is simply
a capital package that investors can trade (Malmendier, Pouzo, and Vanasco,2018)

Types of main financial instruments
Bond
It is a financial instrument created to raise capital for the financial market. The bond
issuer usually makes loan agreement with the investor, whereby the party is issuing
the bond, agrees to pay a certain amount of cash in a set date that they both agreed on.
In this case, the investor purchase the bond and that is loaning the bond issuer; the
money lent out is supposed to be paid back on the agreed date when the bond matures.
But the investor will be receiving interest before the maturity period (Camilleri, and
Camilleri, 2017)
Shares
According to Lehmann (2016), these are units that represent ownership of interest of
an entity or a corporation by a person or business. The shares represent the percentage
of profit that the investor is eligible for in case they incur the profit, and it is earned in
the form of dividends. The main types of shares include; preferred shares and
common shares.
Currency
This is a medium of money exchange in which the money can either be in the form of
notes or coins. Currency varies depending on the countries it’s representing. It can
either be in US dollars, Australian dollars, European euros, British pounds or Indian
rupees. These currencies are the main ones traded amongst nations in the financial
foreign exchange market (Huang,2018)
Equities
They include stocks or shares that an individual or a company owns, and they are
traded in the security exchange market.

Key players in the financial market
Various parties are involved in the financial market to enable the fast growth of the
market. They are referred to as the key players of the market. They include;
Investors
These are the banks, borrowers, and lenders who play a part in the capital market.
Borrowers are individuals or businesses that need capital from other entities to run
and grow their business operations. On the other hand, lenders are people or
corporations that offer money to individuals or companies in need of capital to run
their businesses (Piskorski, Seru, and Witkin,2015). The corporations in need of
capital exchange with equities, which are basically in the form of bonds or shares. The
financial institution in this market can either be the lender or the borrower.
Intermediaries
They include the middlemen, which are either a person or an organization, and a
broker. Their function is to connect investors for business or to trade on their behalf
and get paid on commission. Investment banks sometimes may also act as
intermediaries; banks may trade on behalf of the investors to maximize their profit.
Regulatory bodies
Its main function is to regulate operations of the financial markets as well as to ensure
maximum provision of service to the customer and all the parties involved in the
trade. The regulatory bodies also ensure the firms maintain integrity in all their
operations.

Financial processes
The financial processes in most financial markets have been made effective and
efficient with the availability of the above discussed financial instruments, and key
players of the capital market. The process takes place as explained.
In the most financial market, for the financial process to take place effectively, it
mainly depends on the type of capital market. In the stock market, the financial
process takes place with the availability of shares only; no key player is needed. The
process here involves the trade of shares ownership of the companies. In the money
market, the bond is traded, but in a short term period, borrowers who are bond issuers
deliver bonds to the investors in an exchange with money (Doroudyan, et al., 2017).
Intermediaries can be involved in such trade. After the bonds mature, the lenders get
them back with an extra interest fee; an example is the trade of Treasury Bills. The
capital market operates slightly different compared to the money market. Equities are
traded under this market for the long term. Investors purchase equities or debts to sell
it again after a long period; an example is the New York Stock Exchange (Murray,
2016)
In commodity market, key players are buyers and sellers, they buy and sell products.
For this type of market, the commodities traded are natural resources, and a specific
market is created due to the unpredictable change of price for the products. The buyer
first research on the future market, identify the seller then buy the product and store to
sell after the price goes high, an example is the Minneapolis Grains Exchange.
Under derivatives market, trade is determined by contracts based on the market value
of assets traded. Investors conduct research either by themselves or by use of brokers,
if the market value is high, the sign a contract to have the assets, which they later sell

or swap them to earn a profit, for instance, swapping of fixed interest rate with a
floating one is a derivative trade. In the foreign exchange market, currencies are
traded. Investors mainly use intermediaries to trade on their behalf. The brokers
identify the currencies that are highly used in the market to trade with them and earn a
profit, which they later share with the investors (Benigno, Converse, and Fornaro,
2015)
Allocation of capital within a domestic economy
Capital allocation involves giving out the financial resources to certain sectors within
that particular country to enable them to increase profit and improve on the efficiency
of operation. With its main purpose being to maximize on profit, and provide much
wealth which is money to the shareholders of the company involved to increase their
returns. However, this act might also put t both parties involved at a risk of loss, most
regulatory bodies discussed above, have try to set up rules and regulations to protect
investors from incurring loss in the domestic economy (Almeida,Kim, and Kim,
2015)
Various methods of capital allocation in the domestic economy are; re-purchasing of
shares, the shares purchased by investors can be sold back to the company so that the
investor can raise some capital for their business when they are stuck financially.
Another method is paying dividends; in this case the investor may exchange their
dividends with capital instead of waiting for its maturity. Lastly, the most used
method in domestic economy is paying down debt (Out and Anam, 2016). The
borrower is assisted by the company paying the active loan or debt before the pay date
period; this enables the borrower to have humble time investing with the loan without
the pressure of paying back soon since the payback period will be extended. The

government should also increase demand for various products to make investors trade
more to boost economic growth, according to Keynesian theory.
A well set up monetary and fiscal policies helps many organizations achieve their
objectives in the financial market. For instance, the Bank of England operates on a
consistent and appropriate base level of the interest rate so as to maintain strictly 2%
inflation rate, which is the main objective of the bank, and the policy that guide it was
set by the UK government. Also, large corporations are now raising their capital by
issuing shares of stock to lenders in exchange for money or exchanging bonds with
cash to the interested party.
Allocation of capital within the international market
According to Maggiori, Neiman, and Schreger (2018), this involves the issuance of
financial resources across borders to promote the global financial market. This in
return leads to an increase in profit earned from the international market since the
market will expand. The main purpose of allocating the capital is to encourage
international trade, as well as to attract more investors from various countries. Foreign
stock market plays a great role in the international market. The financial market
creates an avenue that accommodates traders worldwide. Since it’s made up of banks,
investment firms and commercial companies, the allocation of capital is made easy.
The banks or the firms can allocate capital to investors through re-purchase of shares
(Banerjee, Devereux, and Lombardo, 2016)
World Trade Organization, on the other hand, provides an avenue where financial
services are offered to traders. The services include saving for the investors and
allocating capital to help finance and promote productive, and effective investment.

International market also obtains its capital from the International Monetary Fund
(IMF). The main aim of the organization is to ensure the financial stability of the
international markets to have sustainable economic growth. World Bank works the
same way as IMF, both focuses on economic growth of countries engaging in global
trade. The two organizations also work in hand to reduce debts burden for various
developing countries through an initiative called Multilateral Debt Relief Initiative.
This is a way of capital allocation through a method of paying down debts. Also, the
European Central Bank (ECB) helps to set up monetary and fiscal policies which
govern many organizations worldwide to assist them in achieving their objectives in
the financial market (Georgiadis and Grab,2016)
For instance, most businesses are currently taking the risk of investing directly in
foreign markets through a Foreign Direct Investment (FDI) to increase their profit
and attract fast economic growth. Example of countries that have engaged in FDI is
the Coca-Cola, and Toyota Company. The two companies have invested in foreign
countries, mostly developing ones. Since FDI is said to be the modern way of
maximizing on profit. Moreover, the Global Value Chain has mostly promoted the
global business, it is put in place to ensure different process of production from
manufacturing, transporting, and packaging must take place in different countries, the
process has been divided in to steps that are supposed to be carried out in different
countries (Otchere, Soumare, and Yourougou,2016)
Evaluation of BRICS emerging economy
The emerging economy has been identified to be very important to the economic
market; it's the topic currently being discussed by almost everyone in the world.

Businesses, individuals, and countries including BRIC countries focus on benefiting
from this economy. As discussed below, the emerging economy may provide various
opportunities as well as some threats to all parties that embrace it (Menkhoff, et al.,
2016)
Opportunities
The emerging economy stands a great chance of enabling the countries involved to
have a fast and stable economy which creates a better business environment. The
countries will also be able to improve the living standard of middle-class individuals
and help most of them to have a stable source of income. The emerging economy also
provides an opportunity for organizations to create joint ventures between local and
international business. For example, Coca Cola company already identified the
possibility of fast growth in BRIC countries, the company, therefore, went ahead to
open up its business in all these countries and recently reported the big four states as
the most prominent area of its growth in sales (Dickenson-Jones et al., 2016)
Threats
Despite the opportunities that the emerging economy offers, it is also associated with
various threats which may put off some investors. The customer’s needs may vary due
to differences in culture and preferences thus discouraging investors. Connecting
logistics may also be a challenge, due to poor infrastructure in some countries; this
will, in turn, hinder distribution. China and Brazil have set up modern and friendly
foundations which attract businesses. Marketing can also be difficult due to the
communication barrier, and the differences in laws and regulations. BRICs, in this

case, have not fully embraced the use of standard language and these results to a
significant challenge to investors.
Push factors that make the emerging market attractive
Various factors may push countries from investing in domestic and prefer to spend in
other countries. They include; strict laws and regulations which BRICs have not put
up to drive away investors; for instance, China has very business-friendly laws which
have attracted so many foreign investors. Weak and unstable economies also push
away traders. China is leading with a high GDP of 66% which shows it has a stable
economy, therefore attracting more businesses (Chalmers, 2015)
Pull factors that make the emerging market attractive
The fast-growing middle class, sustainable and stable economic growth and a rapidly
growing population in the BRICs, greatly attracts most investors. Therefore, lead to a
fast emerging economy.
Also, the high level of technology in the big four countries have also attracted more
businesses. China is leading to rapid technology advancement followed by India.
China has however focused more on manufacturing, while India is the most known as
IT expert country, and it exports IT services (Heirati, and O’Cass,2016)

Challenges country faces due to industrialization and trade policies.
Unsuitable technology
Industrialization moves hand in hand with technology. However, most countries have
been unable to put up suitable technology as well as catching up with rapid changes
and technological advances. Some activities that are performed in various industries
require some specific use of technology, failure to these results to that activity or
operation not to be completed. In the end, this will be a great challenge to the country.
This makes it difficult for the economic growth of the country unlike in the developed
countries which have suitable technology (Lee,2016)
Pollution
Most countries now face the pollution problem; this is due to a rapid increase in the
number of industries, especially the manufacturing industries in developing and
developed countries. Gas and smoke emission results in air pollution. Sounds from
machines used in the company’s results in noise pollution. Careless disposal of
products results in water pollution.
Increased disparities in wealth distribution
Emerging economy depend largely in industrialization for fast growth. Countries are
however facing a great challenge; this is due to the inconsistency of wealth
distribution whereby, slowly growing economy will be distributed with little wealth
and investment will be stagnant, as compared to the fast-growing economy. Those in
possession of means of production are entitled to high income compared to those

without ownership. The gap between the rich, and the poor increases due to unequal
distribution of labor and capital (Kikuchi, 2018)
Restrictive policies
Strict trade policies set up by developing countries prevents most investors from
active business operation growth. The policies restrict even foreigners from investing
freely in particular countries (Scott, 2017) this is due to the differences in tariffs
charges and trade subsidies. Some products are charged with very high taxes,
especially the ones imported, this limits the importation by traders in the country.
Social disadvantages
Industrialization leads to the growth of urban centers. Most people within the country
will then move to an urban center for employment. Congestion in urban centers may
result in increased cases of crime. The living condition will also be distorted due to
pollution and change of lifestyle, food to eat and increase in diseases that might
spread rapidly. Exposure to noise from manufacturing machines and dirt also affects
the health condition of individuals. This, in the end, causes stress and psychological
torture of people. Therefore, this affects their social life (Mountjoy, 2017)
Conclusion
The financial market is the largest one according to the current research. The
marketplace has offered the opportunity to millions of people to invest and trade. The
advantage of this type of market is that it provides an opportunity for a most

individual to trade at the comfort of their homes, and at any time. The market also
offers an excellent chance for developing countries to grow fast, and to also ensure a
rapid, stable and sustainable economic growth. The financial market has in place
stable financial instruments required to operate in the market. The key players
discussed also plays a great role in the sector. They are seen to very important because
they are the ones that coordinate activities and ensure all operations are carried out
effectively. Therefore, a good financial market is made up of competent key players.
Also, enough capital is identified to lead to long-lasting trade and fast economic
growth. Both the domestic and international market should always have a stable
source of capital that allocates money to them when needed. Finally, the emerging
economy should focus more on opportunities brought about by the changing trend of
business operation. Most countries should also embrace industrialization despite the
challenges (Xu and Lin, 2015)

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