Perfect Capital Market ?

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  • November 8, 2012 at 3:35 pm #54990
    Avatar of qamber hussain
    qamber hussain
    Participant

    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 !

    November 8, 2012 at 4:34 pm #106410
    Avatar of Vipin
    Vipin
    Participant

    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.

    weak form
    current share price reflects all information that could be obtained from studying and analysing past share price movements.

    semi-strong form
    the current share price reflects all publicly available information.

    strong form
    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.

    November 8, 2012 at 4:50 pm #106411
    Avatar of Vipin
    Vipin
    Participant

    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 taxes
    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.

    November 8, 2012 at 8:54 pm #106412
    Avatar of johnmoffat
    John Moffat
    Keymaster

    Excellent Vipin :-)

    November 11, 2012 at 3:36 pm #106413
    Avatar of sukshma239
    sukshma239
    Participant

    why doesn’t perfect capital market require Tax?,
    why should all investors be risk averse and rational(what does ‘rational’ mean?)

    thank you.

    November 11, 2012 at 8:24 pm #106414
    Avatar of johnmoffat
    John Moffat
    Keymaster

    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 :-)

    November 12, 2012 at 7:06 am #106415
    Avatar of acca13
    acca13
    Participant

    I think perfect capital market says it all :)

    November 12, 2012 at 8:15 pm #106416
    Avatar of johnmoffat
    John Moffat
    Keymaster

    :-)

    November 13, 2012 at 5:28 am #106417
    Avatar of sukshma239
    sukshma239
    Participant

    thank you John.

    November 13, 2012 at 7:09 pm #106418
    Avatar of johnmoffat
    John Moffat
    Keymaster

    You are welcome :-)

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