What does perfect capital market mean ? (all information is available for investor about financial market!) and how it is linked with efficient market hypothesis ( weak form, semi strongform or strong form !).
can you please elaborate it in simple way !
Market efficiency is usually taken to refer to the way in which ordinary share price reflect information.
The efficient market hypothesis describes an effcient market as one where security prices fully and speedily(instanteously) reflect available information.
The hypothesis takes 3 forms depending upon the extent of the information deemed available to market participants.
current share price reflects all information that could be obtained from studying and analysing past share price movements.
the current share price reflects all publicly available information.
current share price reflects all information, including that which is privately held.
if market is weak form, one person can make abnormal gain by studying public information(financial statements).
if market is semi-strong, he cannot gain by analyzing the public information as it is already reflected in share price as soon as the information is announced. so, to make abnormal gain that person has to get private information(that is actually illegal).
if market is strong, he cannot gain by analyzing the recent public information and inside information. bcoz it is already reflected in share price. in that case, he can make abnormal gain only by luck.
capital market refers to market of long term finance mainly via stock exchange.
perfect market captial assumes that all securities are valued correctly and return is always directly proporional to risk associated with it.
A perfect market requires
no transaction costs
perfect information that is freely available to all investors
all investors to be risk averse and rational
a large number of buyers and sellers in the market.
why doesn’t perfect capital market require Tax?,
why should all investors be risk averse and rational(what does ‘rational’ mean?)
The problem with tax is that in real life there are taxes on capital gains.
Investors being risk averse does not mean that they will not accept risk, but that they will require a higher return the greater the risk.
Rational means sensible
I think perfect capital market says it all
thank you John.
You are welcome
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