INVESTMENT ANALYSIS
Topic: SECURITY MARKET
For
questions and answers, email theotherwomaninmarriage@gmail.com
Companies raise long term funds in the forms of equity and
debt from the capital markets. Capital market
facilitate the buying and selling of securities, such as shares and bonds or
debentures. They perform two valuable
functions: Liquidity and pricing
securities.
Liquidity means the convenience and speed of transforming assets
into cash, or transferring assets from one person to another without any loss
of value. Cash is the most liquid asset
as it can be readily converted into any other asset, or transferred to another
person without any decline in value.
Capital markets make the securities liquid. They help to reduce, if not eliminate
transaction costs.
The demand and supply forces help in determining the prices
of securities. Since all information is publicly available, and since no single
investor is large enough to influence the security prices, the capital markets
provide a measure of fair price of securities.
CAPITAL MARKET
EFFICIENCY
The capital market efficiency may be defined as the ability
of securities to reflect and incorporate all relevant information, almost instantaneously,
in their prices.
Three levels or forms
of capital market efficiency
i.
Weak-Form
of Market Efficiency
ii.
Semi-Strong
Form of Market Efficiency
iii.
Strong
– Form of Market Efficiency
Weak form efficiency: this is concerned with the adjustment of securities
prices to historical price or returning information. If the market is weak form, no investor can
earn any excess or abnormal return base on historical price or returning
information.
Semi-Strong Form: Semi – strong form efficiency is concerned with
whether security prices fully reflect or publicly available information. Semi – Strong form efficiency requires the
market to be weak form efficiency.
Strong Form Efficiency: Strong form Efficiency is
concerned with whether the security prices fully reflect all the information
available to public or not.
TYPES OF MARKET
EFFICIENCY
There are two types of market efficiency:
1.
Internal
Efficiency Market
2.
External
Efficient Market
Internal Efficient
Market is one in
which brokers and dealers compete fairly so that the cost of transacting is low
and the speed of transacting is high.
External Efficient
Market is one in
which information is quickly and widely disseminated thereby allowing each
security price to adjust rapidly in an unbiased manner to new information so
that it reflects investment value.
No comments:
Post a Comment