Finacial Markets UK
Finacial Markets UK
Finacial Markets UK
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Executive Summary
Financial markets provide the primary source of capital allocation both for the domestic
and international economy through trade, investment, and development aims. Financial markets
promote and enhance foreign and domestic business entities to raise funds to meet the set capital
requirement thresholds in any given market structure. Additionally, financial markets allow the
stability of domestic and global economic systems by allowing smooth and continuous
transactions with no breaks within the global market while minimizing the price of stocks.
Through financial markets, entrepreneurs and citizens from various countries have enjoyed the
United kingdom is one of the world's most established economies with a solid economic
performance in the last decade. The stability in United Kingdom's economy is illustrated through
its infrastructural developments, urbanization, and high living standards to its citizens. Therefore,
financial markets directly impact living standards, and it is not only about how domestic and
foreign investors interact with the market. The UK's banking system is divided into three
branches;
High Street bank; These are banking institutions that offer services to the general public
Business banking services; These are provided by high street banks in the United
Kingdom in ordinary accounts. The difference with the high street banks is that it involves
Investment banking services that the other intermediate financial institutions facilitate on
According to the recent financial reports released by Moody's in June 2021, the outlook
for financial institutions and banks in the United Kingdom is relatively stable. Therefore it
reflects the country's intrinsic institutional and economic strength and positive indication that the
debt level will subsequently subside at its current level. For this analysis, especially in the first
task will major on the financial markets in the United Kingdom in relation to the roles and
contribution of top financial institutions in the UK such as Barclay's Plc, HSBC Holdings,
Lloyds Banking Group, Royal Bank of Scotland and Standard Chartered Plc among other players
in domestic and global financial markets. The report also focuses on the UK's domestic economy
and capital allocation about their modes of operation to achieve their financial objectives through
fiscal and monetary policies. The second part of the report addresses the emerging economy of
China through evaluation of its gross domestic product (GDP) and gross national product (GNP)
Task One
where domestic and foreign derivatives and securities are traded. In economics and finance,
security is a collective term that refers to bonds, currencies, and equities, while derivatives refer
to contracts for various swaps. The financial markets can be expressed in terms of local/domestic
or global/international markets. Generally, financial markets are defined by fees and costs, rules
and regulations on trading, market forces, and transparent pricing that determines the trading
value. The overall structure of the financial market is as illustrated in the figure below
Categories of Financial Markets (Mauro, and Hassan, 2019).
The structure of financial markets gives an indication of the business activities of a given
country. For instance, UK's Capital, the London Exchange market, through its Forex exchange
market, is the biggest financial market in Europe where approximately trillion pounds are being
traded daily. New York Exchange market is another stable market with an established active
Debt Market; This refers to financial markets e where debt instruments are freely traded;
debt instruments refer to assets that demand fixed payment, usually with interest to the holder.
Debt markets make an essential component of domestic and international financial markets; for
example, bonds are traded both in local and global markets and are a perfect example of a debt
market element. As of July 2021, the United Kingdom was at approximately £36 billion in debt
securities, making it one of the deepest stock exchange markets in the world. An example would
Equity Markets: The stock market is also known as the stock market, which refers to the
financial market where equity instruments are traded. Stock is trade securities that are often
claimed on the assets and earnings of a corporation. A perfect example of an equity instrument
would be stock shares like those traded on the New York Stock Exchange. Investors often
observe the price of the securities, invest in stock purchases to increase wealth. In the stock
securities are created. It's at primary markets where business firms and corporations float (sell)
their bonds and stocks to the interested public for the first time. A perfect example of a primary
market is the IPO (initial public offering). Here traders provide investors with varied
opportunities to purchase securities from the central bank that made the first underwriting for
particular bonds or stocks. An initial public offering market occurs when a private company
markets such as Nasdaq, FTSE 100, LSE, and New York Stock Exchange (NYSE), among other
established exchange markets around the globe. The distinguishing feature of secondary markets
is that investors trade and transact among themselves, unlike with the primary needs (Stefan,
2018). In other words, in secondary markets, previously issued securities are traded without the
company's involvement.
least one type of financial market, although they vary in size. Some are local, while some are
global or internationally known. These subgroups are as shown in the diagram below
i. Maturity of Claim
Financial markets are classified in terms of claims households and investors have on the
commodities of trade and investment. In economics, there are two main types of claims; residual
claims and fixed claims. By nature of claims, there are two types of markets; Debt market and
Equity market (Mauro, and Hassan, 2019). These two markets have been discussed in the
previous sections
Classification by maturity of Claims
While investing on securities of trade in the stock market, the maturity period is of the
essence since the value of the investment depends on the period and time horizon of trade. There
Money Market; Refers short-term fund market where investments on stock securities are
for a period not longer than one fiscal year. In general, it deals with monetary assets like
commercial papers, treasury bills, and certificates of deposits. Investments in the money market
Capital Market; in this market, bonds, shares, and stocks of medium- and long-term
maturity are the trade items. It is associated with maximum interchange of money as it assists
companies to access more capital through preference share capital and equity capital (Stefan,
2018). It also allows traders to invest in the equity share capital of the corporation or company
Timing of security delivery can also be used to categorize financial markets. This concept
of classification prevails in the stock or secondary markets. The two categories are; future market
securities are done in real-time, and the total amount of investment is to be paid by investors
Future market; Unlike the cash market, here settlement of commodities of trades are set
for a future date. In future markets, transactions are generally through cash instead of the
delivery settlement approach. Traders are not compelled to pay the full investment amount but
Key players in UK's financial markets are the banking institutions, primary dealers, stock
exchanges, financial institutions, brokers, foreign institution investors, merchant bankers and
custodians, speculators, hedgers, margin traders, and arbitrators. The UK's stock market has been
on the rise in the past few years due to perfect coordination of trade among the highlighted
stakeholders
Banking institutions form the central network systems of financial markets as they
provide financial advice and support to firms and people who participate in the stock exchange
trade. They organize the payment channels such as loan provisions, taking deposits, and assisting
In the United Kingdom, just like most countries, the central bank is the regulator and
controller of all banks and financial institutions across the county. It institutes and provides
monetary policies, issues national currency. For instance, it is the role of the Bank of England to
monitor the operations of all financial institutions in the UK and issue the national currency
(Mauro, and Hassan, 2019). Other functions include the role of the Bank of England to supply
money and currency to all commercial banks within the country in the event of a financial crisis.
Bank of England manages UK's reserves and control the money circulation in the economy. As a
regulation of monetary policies, central banks set the standard interest rate on loans used by other
Monetary policy
Monetary policy is the set of guidelines that governs and controls the money supply
within an economic system. One of the primary roles of the central bank is to set monetary
policies to be used by banking and financial institutions. The four aspects of monetary policy are;
adversely affects the economy; high inflation results in a high cost of living and devalues the
country's currency in the international stock market. For instance, as of October 2021, the UK's
inflation rate was at 2.6%, implying the country's economy is in good condition.
Interest rate; It is another critical aspect of monetary policy set by the central bank to
control domestic money circulation in the economy. For instance, the Bank of England increased
the interest rate from 0.5% to o.75% to encourage the deposition of money to control money
Therefore, the central bank is mandated to set monetary policies that favor local and foreign
investments to offer employment opportunities to its citizens (Shenkar, and Luo 2020). For
instance, as of October 2021, the UK's unemployment rate was at 4%, a decline by 0.03% from
the previous year's (2020) rate. The drop is attributed to low-interest rates that encourage
entrepreneurs to take loans from banks to self-employ and create employment for others.
initiate investments. Regulations allow that loans be provided on a long-term basis. For example,
in the UK, loans on the land, property, mortgages, or businesses are provided for five years or
more.
Savings: It is advised that saving be short-term and encourage the use of money on
investment projects to accrue profit instead of saving. Personal or bridge loans are provided for 2
Stock Markets
The main financial market in the United Kingdom is the London Stock Exchange Market.
It is mandated to allocate monetary value for all capitals in the domestic economy. United
Kingdom's economy has survived most of the economic crisis because of the stable and well-
organized Stock Exchange market. For instance, in 2020, over 1.4 billion pounds have been
traded in the FTSE in LSE. Below is a typical model of the Stock market
broker and seller's broker. It recognizes purchasers under seller or purchaser brokers in its
financial market. Shareowners are allowed to make sales through seller's brokers, and investors
Capital allocation and capital efficiency are the main roles of the economy. Therefore,
every economy needs to invest its capital in sectors to provide good profit (return on investment).
The UK's financial markets are the source of capital for its domestic market trades, development,
and investment purposes (Shenkar, and Luo 2020). London Stock Exchange Market works for
capital allocation within its domestic economy to boost economic investments, trade, and
development.
International markets are the expanded forms of domestic markets. Hence they also work
Commercial Banks
Savings; Through the central bank, commercial banks are permitted to give short-term
loans to businesses in various countries or states. For instance, HSBC is a typical example of an
international commercial bank that offers personal or bridge loans for 2 weeks to 3 years to
Loan; Just like the domestic economy, the international economy through commercial
banks also allows long-term loans. For example, Barclays offers land property ownership loans,
house mortgages, or business loans for less than five years in the UK.
Bond: Bond is another source of capital allocation within domestic and international
markets. Bond can be expressed as the fixed income on investment where a lender offers a loan
for a specified time. Bonds are widely used by states, governments, companies, and municipals
as a source of funds and revenue to support different economic projects. As of 2020, the UK's
financial market allocated over £ 45 billion in loans and grants through bonds
Eurodollars; It is the foreign currencies that are deposited in foreign banks. When China
deposits US dollars in UK's bank, the deposit is called Eurodollars. In 2019, just before the
Covid-19, the Eurodollar market turnover averaged £ 140 billion, with the UK controlling about
17.4% of the Eurodollar market (ONS 2019). Eurodollar can only be utilized by banks and
It is the market space where investors, firms, or corporations can sell, buy or speculate
foreign currencies. In the UK, it is referred to Forex market, where trillions of pounds are traded
daily. Some of the popular forex markets globally are Tokyo, London, Kenya, Sydney, New
Global Stock Market; It is the free financial market where foreign companies can freely
make sales of their securities within the host financial or stock market. In the UK, Bulldog is an
example of a global stock market, and in the US, Yankee is an example of a worldwide stock
market.
Derivatives; Are financial securities with monetary value derived from a series of assets.
Non-bank financial institutions are an umbrella name for financial entities that can only
lend but not offer other banking services like depositing cash. Examples are insurance
In the domestic and international economy sphere, WTO influences financial operations
as follows; it develops and enforces the set financial trade policies and standards to provide
fairness and equality in the international finance market. It acts as the referee in bilateral trade
agreements by providing necessary guidelines for smooth and effective fulfillment of trade
agreements. In addition, WTO offers financial advice, assistance, and training for developing and
Contributions of OECD
intergovernmental body formed in early 1948 with 36 member states. It impacted international
trade in the following manner; it develops economic policies geared toward eradicating poverty
and promoting economic growth for governments of its member states. It contributes to
environmental conservation and social development for its members (Mauro, and Hassan,
2019).. It allows free trades with subsidized tariffs for trade among member countries.
CHINA'S ECONOMY
China's economic development has surprised the world's superpower countries; within
four decades, China's economy has risen from a status of a developing country to a significant
economic powerhouse. Statistics reveal that between 1979 when China's government adopted the
economic reforms up to 2020, its gross domestic product grew by an average of 11% annually
(ONS 2019). According to the latest report released by the World Bank, China is the only
country that has experienced the fastest sustainable economic expansion within the shortest
period. It elevated over 800 million citizens out of poverty. Currently, China tops in the ranking
of world's economic size in purchasing power parity, merchandised trade, lean production as
GDP; according to statistics shown by World Bank, in the year 2020, China's GDP was at
14722.73 billion dollars, representing 14.02% of the world economy. These figures were
obtained to measure its national income and output, equivalent to overall expenditure for all
GNP: Gross national product, referred to as gross national income (GNI), measures the
total sum of value added by all resident producers plus product taxes fewer subsidies. The trend
on China's GNI has been on the rise since 1957 through to 2020, with its GNI in 2020 valued at
$14880.7 billion, a 2.5% increase from 2019 despite the economic challenges imposed in the
Agriculture is one of the foundation pillars of China's economy. From the early centuries
to the present, agriculture has remained vital in economic sustainability, not only in China but
even in the rest of the world. Through a stable agricultural sector, China has fed its over 1.4
billion population without much aid from other international organizations. In 2020, China's
agricultural sector contributed to over 7.8% of the GDP. In the past five years, agriculture has
improved courtesy of increased technological innovations that have seen smart agriculture and
intelligent farming methods adopted in China. China also ventures in commercial crop
production that serves as export to other international markets, and in 2020, the exportation of
Service Sector
As a country with the highest population, service is an essential commodity for survival.
The service sector is the highest contributor to China's GDP, with 54.5% of China's economy.
China's service sector include; transportation, IT, finance, hospitality, business services,
Manufacturing/Production
In the past 5 years, China has emerged on the top list of leading manufacturing countries,
The production sector contributed over 37.8% to the country's GDP. A significant contribution
came from telecommunication gadgets, technical equipment, and machinery production (ONS
2020). The government involvement has facilitated this to promote business and rapid
industrialization
International Trade
In 10 years, China has done exemplary well in international trade. China is a major
exporter of a variety of commodities to the international market and a kind importer of other
products from different countries. In 2019, China's export was valued at £98.4 billion, and it
increased to £164.9 billion in 2020. The increase in export and imports has achieved
approximately 150 billion just in a decade (Mauro, and Hassan, 2019). They are leading export
items to include military equipment, android smartphones, textile, automotive, electronics, steel,
Though China has projected a steady rise in economic growth, industrialization has
brought some challenges to the country's economy. Some of these challenges are;
Labor productivity; Industrialization has happened too fast, creating more opportunity,
but the country still doesn't have enough skill power to match the demand
With hundreds of thousands of industries, environmental sustainability and climate
change has become the most significant challenge in China and its neighbors
The tax burden is a challenge in China; most entrepreneurs have complained of the high
tax burden on foreign investors in the country, thus hinder diversity and international trade
Conclusion
Financial investments and international trade both directly and indirectly impact domestic
and international financial markets. For countries or regions to achieve sustainable economic
growth, there is a need to improve the financial markets since they are the key sources of capital
allocation in the economy. Trade policies and industrialization, on the other hand, directly and
indirectly, affect domestic and international financial markets through economic growth.
Mauro, F. and Hassan, F. (2019). Financial markets and allocation of capital. London: Centre for
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https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/articles/ukforeig
ndirectinvestmenttrendsandanalysis/july2019
https://www.shutterstock.com/image-illustration/diagram-financial-markets-116807821
https://www.statista.com/statistics/306720/inflation-rate-forecast-consumer-price-indexcpi-
united-kingdom-uk/
Stefan, N. (2018). The liquidity premium of near money assets. The Quarterly Journal of
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