Financial Market Report

As asserted by Adrian and Adams (2012), financial markets is a trade fair in which people or organizations buy and sell commercial or financial securities and derivatives in the current market or future at low transaction costs. These securities include treasury bonds, shares or precious metals such as gold or diamonds whose market value do no depreciate or fall due to inflation or other external factors affecting the market trends, for example, civil or political wars. In this trade, the market it refers to more designated and highly secure exchange places or organizations that are involved in the stock exchange or financial commodity exchange. The market may be a physical location such as New York Stock Exchange (NYSE) or a virtual electronic exchange system such as National Association of Securities Dealers Automated Quotations (NASDAQ).

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In Financial Markets, trading of bonds, precious metals or currencies is mostly bilateral in that it involves not more than two parties, although some organizations are engaged in the multilateral exchange of bonds.

Types of Financial Markets and their Classifications

Financial Markets are everywhere across the world, with differentiated market size, and clients. Some, like NYSE and Foreign Exchange (ForEx) are very large and transacts billions of dollars every day while others are small and only manage to negotiate small amount money within their local homes. Investors that trade with financial markets has access to assorted finances that represent a wide range of commercial products with some markets open to both public and private investors and others only open are exclusively open to international monetary firms especially those that trade with bonds and precious metals. In this regard, therefore, this research paper sorts to give the types and classification of financial markets based on the clients they serve and their capital outlay.

Capital Market

Capital markets are those markets that are associated with both private and public exchange of financial securities (Etsy & Benjamin, 2003). These institutions often sell and buy securities and bond to raise money that is needed elsewhere in development or expansion of other businesses, making the market have both primary and secondary characteristics of trading. For example, if a government of a particular country need s capital (funds) to sponsor its development projects, it sells its treasury bonds in the security ma market, i.e., through Local Purchase Order (LPO) to its citizens and thus making the necessary money. Capital markets are classified into two distinct features though they are related, i.e., Stock and Bond markets.

Stock Markets

A stock market is a form of security trading in which investors buy and sell their shares or organizations sells its shares to raise capital for expansion (Bernanke & Mark, 2008). The markets play a critical role in the economy as they help the organization to raise the money required to support the business operations and also makes individuals have small ownership of the organization and can direct its management or daily activities. Organizations that are involved in stock market ensure that the new shareholders incorporated in the business help the company to expand its research and development base for prospects of profit generation. In this market, the profit realized at the end of every financial year is divided among the shareholders in the ratio of their share in what is referred to as dividends. This market can be subdivided into secondary and primary markets in which primary markets is a platform where new market ideas are formulated, and the secondary market is a base where implementation of new ideas is done.

Bond Markets

A bond is a debt in which an organization or a government borrowed money or capital from another government or its private sector for a specific period and paid at a fixed interest rate (Demirgüc-Kunt & Vojislav, 2007). The interest rates are not affected by government monetary or fiscal policy or market trends such as fluctuation of commodity prices or global inflationary gap. In most cases, bonds are used by governments or state authorities to fund their social development projects. Bonds can be bought or sold on credit in a market structure referred to as the fixed-income market. The significant difference between bonds and the stock is that bonds are larger in nominal value than share and are traded by large organizations or government only, the private sector is exclusively not allowed in trading (Demirgüc-Kuntet al., 2007). There are several types of bonds, such as corporate, municipal/state bonds, notes, and bills. All these bonds are collectively referred as treasury bonds and are exclusively sold by the central banks of involved states or countries.

Money Market

The money market is a type of financial marketing in which financial tools with very high liquidity value and short maturity period are sold and bought. These include foreign exchange, bitcoins and others (Bouwman, &Christa 2013). Traders or investors in the money market use it for lending and borrowing of short-term capital, mostly less than one calendar year. In this market, there is a fixed amount of deposit that the participants short have commonly referred to as Certificate of Deposits (CDs) although the deposits vary from one financial institution to the other. Unlike capital market, money market allows all kind of investors, private, public or individuals who need necessary capital to finance their operations (Bouwman & Christa 2013). Because of the high level of uncertainties in the market, trading in this market offers minimal returns as compared to another security trading. There are three classifications of the money market, i.e., spot market, derivative markets, and forex or interbank market.

The spot market is whereby securities are sold and bought in real-time and at the current prices (Bouwman & Christa, 2013). This method is sophisticated and highly risky because the market price of goods and services is settled on the spot and any fall in the cost of the products can lead to huge losses especially if an individual has invested a lot of money at the current period. Unlike other markets, Spot market prices are determined in forwarding prices in that the amount of an item can be very high or very low in the current period and fall or rise in the forward period. Traders in this market operate on the prospect of the prices so that to realize marginal profits.

Derivative markets involve the acquisition of capital from an unoriginal price of an asset. This derivative is a contract that is not fixed, but it is received from manipulation of other related asset prices (Auboin & Martina, 2013). This method is complicated; however, it is commonly used in risk management to assess the value of assets that are damaged if an accident occurred. Most derivative markets are forward markets, i.e., they determine the prices of assets in the future rates.

Forex or interbank trading is a form of market in which financial institutions trade with liquid money. For example, if a bank reserved ratio falls it can buy cash from other banks so that it can retain its booked rate by close of the shop. Forex is the world largest liquidity market and trades more than USD1.5 in a day. The risks in this trade are not severe as it is the case in spot market because the world currency value determines trading currencies although they fluctuate and rise during the day.

The Investment Banking Process

According to Manyika, et al. (2014) an investment bank is a private corporation in which is involved in various financial activities including buying, selling, and deposits and withdraw of individual or other companies money in the short term or long term in what is referred to as fixed account deposits. An investment bank can also be involved in none financial activities such as offering assistance to organizations that want to form a merger or other organization buying others. In this regard, therefore, an investment banking process is an activity in which private and public corporate are involved in selling and buying of finances from an investment bank. In this process, there is the buy side in which, the bank offers other institutions assistance regarding suitable investment plan or capital acquisition and the selling party in which the bank sells securities to private or corporate regarding shares, loans or other monetary assets to help in the investment plan.

Determining a Selling Price for a Firm

The Price Earnings Ratio (P/E Ratio) is the value that is received from the relationship between the company’s stock exchange price and the total Earnings Per unit Share (EPS). This ratio tells the investor how much he or she has to pay for every unit of earnings he receives.

Price Earnings Ratio= Price/Earnings

As of May 2018, the average price ratio of oil and gas industry was projected as 38.84. This price ratio is average on all oil and gas industries operating in the US, including the larger Canadian Energy Service (CEU), which has a ratio of 38.66. Therefore, according to this market ratio, Chevron projected that price per share would be $2.5. To calculate the selling price of the firm; P/E=P/Earning

E=2.5*38.84

E=97.1.

This means that, according to the calculation above, Chevron’s firm will sell their products at an average of $97.1 per unit item.

Current Event Related to the Oil & Gas Industry

Oil and Gas industry (OG) is one of the global backbones of development. According to the recent study, the demand for oil products has risen by 12% for the last decade due to increased manufacturing and processing industries. This means that, shortly, the general prices of oil products will increase causing a global shift and general inflation in the world financial market. In this regard, therefore, many countries have developed policy mechanism to counter the rising demand of petroleum products to environmental friend fuels such as solar and wind generated energy to run and sustain their industries (Bernanke et al., 2010). The research has also shown that some countries especially the G-7 states have embarked on the study to tap the ocean currents to produce energy for the industries so that they can curb the demand for the oil products. Combined, these factors have led to fears about a possible future supply shortage of petroleum products because many countries have resulted in not drilling the oil for fear of price and general market fall. The global fall in the drilling of old and gas products have resulted in increased speculation in the futures markets, with substantial upward pressure on prices. To address this artificial crisis, many countries have embarked on taxation of petroleum products so that their average prices can sky shoot and force the oil-rich states to drill the crude oil and hence general fall in the costs globally.