Characteristics of an Efficient Market

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Characteristics of an Efficient Market

Market efficiency is explained in a hypothesis as the manner in which a market is able to list or update its prices in relation to new information. There are three types of market hypothesis; the weak form, the semi strong form and the strong form.

It should have an adequate system that enables trading. The market should operate well, by meeting the expectations of the buyer and selling, in good time and without experiencing any problems. The market should be consistent or have liquidity. Prices should be stable and at equilibrium, such that they do not change rapidly. They should rise and go down in a controlled manner. The transaction cost should be sensible or minimal. The cost in the market should be able to return good rewards and meet the function of supply and demand.

The information in the market should be updated. It should be able to give information on prices that relates to the stock in the market. Information relating to the cost of shares, transaction bids and volumes should be available in good time in order to facilitate decision-making. The buyers and seller in an efficient market should be rational, profit driven, well informed, and be able to seek a reward for a risk. It should also be efficiently allocated. This the way in which the business that brings in the biggest return, is given capital. In an efficient market, the businesses have the same goals; that is to maximize profits. In efficient market, the profit made by the businesses is equal as information provided is the same. The investors compete and try to tell the future values of the market in the securities of individuals. It should provide equal opportunities for both investors and buyers. An efficient market will gain the trust of an investor; hence, a lot of capital can be invested.

Reference:

Cummins, J. D., & AEI-Brookings Joint Center for Regulatory Studies. (2002). Deregulating property-liability insurance: Restoring competition and increasing market efficiency. Washington, D.C: AEI-Brookings Joint Center for Regulatory Studies.

Brigham, E. F., & Houston, J. F. (1998). Fundamentals of financial management. Fort Worth: Dryden Press.

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