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Efficient Capital Market • An efficient capital market is a market where the share prices reflect new information accurately and in real time. Capital market efficiency is judged by its success in incorporating and inducting information, generally about the basic value of securities, into the price of securities. This basic or fundamental value of securities is the present value of the cash flows expected in the future by the person owning the securities
The fluctuation in the value of stocks encourage traders to trade in a competitive manner with the objective of maximum profit. This results in price movements towards the current value of the cash flows in the future. The information is very easily available at cheap rates because of the presence of organized markets and various technological innovations. An efficient capital market incorporates information quickly and accurately into the prices of securities
In the weak-form efficient capital market, information about the history of previous returns and prices are reflected fully in the security prices; the returns from stocks in this type of market are unpredictable.
In the semistrong-form efficient market, the public information is completely reflected in security prices; in this market, those traders who have non-public information access can earn excess profits. In the strong-form efficient market, under no circumstances can investors earn excess profits because all of the information is incorporated into the security prices.
The funds that are flowing in capital markets, from savers to the firms with the aim of financing projects, must flow into the best and top valued projects and, therefore, informational efficiency is of supreme importance. Stocks must be efficiently priced, because if the securities are priced accurately, then those investors who do not have time for market analysis would feel confident about making investments in the capital market. Eugene Fama was one of the earliest to theorize capital market efficiency, but empirical tests of capital market efficiency had begun even before that.
Capital Market Regulations • Regulations are an absolute necessity in the face of the growing importance of capital markets throughout the world. The development of a market economy is dependent on the development of the capital market. The regulation of a capital market involves the regulation of securities; these rules enable the capital market to function more efficiently and impartially.
A well regulated market has the potential to encourage additional investors to partake, and contribute in, furthering the development of the economy. The chief capital market regulatory authorities worldwide are as follows: U.S. Securities and Exchange Commission • Canadian Securities Administrators, Canada • Australian Securities and Investments Commission • Securities and Exchange Commission, Pakistan • Securities and Exchange Board of India • Securities and Exchange Commission, Bangladesh • Securities and Exchange Surveillance Commission
Securities and Futures Commission, Hong Kong • Financial Supervision Authority, Finland • Financial Supervision Commission, Bulgaria • Financial Services Authority, UK • Comision Nacional del Mercado de Valores, Spain • Authority of Financial Markets • The United States Securities and Excha
The United States Securities and Exchange Commission (SEC), established in 1934, has the responsibility of regulating and controlling the securities industry/stock market, and enforcing the federal securities laws.
Public companies have to keep in compliance with the statutory requirements by submitting quarterly and annual reports to the SEC; companies involved in fraudulent activities are brought to task. These submitted reports are essential, as investors require them in order to make crucial decisions before investing in the capital market
The Canadian Securities Administrators (CSA) is responsible for the development of the Canadian Securities Regulatory System and regulates the capital market of Canada, protecting investors from fraudulent and nefarious activities. The CSA looks to establish a just, clear and dependable capital market system.
Capital Market Liberalization • Capital market liberalization, a result of globalization and trade liberalization, refers to the relaxation of government restrictions in the market. Not only government entities, but also private entities participate its functioning, and investors around the world are able to invest in the shares and bonds of other countries.
Worldwide economies, particularly in the developing countries, are opening their doors to foreign investments and capital, enhancing global competitiveness. Unbound circulation of goods and services within and between countries results in an increase in the circulation of money, causing a positive effect on the capital market.
Non-tariff and tariff trade barriers are eliminated, and avoidable legislations and taxes are not imposed as a result. Not only do parties involved in a trade stand to benefit from the effects of liberalization, but gains in productivity and the maximization of the economy's general efficiency are also a result. As well as free access that can be had to the market's information, there is a complete absence of policies that hamper trade and labor, and capital is allowed free flow under the liberalized market.
For a long period of time, the development of open capital markets has been a prerogative worldwide and several economies have made huge developments by opening up their markets. The whole capital market has now become a global common market, with globalization ensuring hassle free imports and exports. Corporations and companies are able to receive external investments and, along with individuals, can gain access to foreign goods and services.
Capital Market Services • Capital market denotes the market where securities are traded. This market is further divided in several types known as debt capital market and equity capital market. The capital market services provide the investors with the opportunity to enter in this market without any real problem. This market has the potential to produce high yields and at the same time, this market can also produce high risk factors
There are several companies involved in providing the capital market services to the investors. The main services that are provided by these companies are stock broking services and consultancy services. Today, most of the equity capital market trades are done online. There are several companies that are providing these facilities to the investors.
Again, the stock broking services which are provided by many companies are of immense use for a large number of investors and especially the newcomers need these services for their own sake. The stock broking firms help the investor to select the appropriate stocks which is the primary condition of this market. These brokers also help the customers to make their investment portfolio in such a manner that the portfolio can adjust itself with the sudden changes of the market.
At the same time there are certain software companies that are providing capital market services to the investors, but in a different manner. Actually these software companies help the online companies to make their services much easier and smooth. At the same time, the software companies are also concerned about adding extra amount of pace in the process because speed alone can emerge as as decisive factor in the capital market
Again there are a number of online portals which are providing capital market services to the investors. These portals are providing all the latest information and changes regarding the market. These information are very important from the investors point of view because constant update of information regarding the market can help an investor to raise his profits and at the same time, it also helps the investor to reduce the risk factor.
Capital Market Research • Capital market research is an essential activity for companies because it enables them to provide products and services that are useful for the targeted consumers. Such a focused and logical approach enhances the profit making possibilities of companies. The companies can earn more dividends and at the same time minimize risks as a result of research on capital markets.
One big advantage of capital market research is establishment of proper communication between the companies and the customers. The customer reactions to various services provided by the companies can be measured as a result of capital market research. The companies can thus do away with wrong policies and look to take the right steps
The companies can also locate the right opportunities through market research. If the company undertakes capital market research before launching a new product or service then it stands a better chance of getting a good return.
Risk minimization is another reason for undertaking capital market research. Through this research, the exact needs of the market and the general public can be gauged and the products and services can be made very demand oriented. The companies can also analyze whether they are making progress in the right direction
Capital market research should be done as early as possible in order to avoid problems in the future. Before investing in the stock market, stock market research needs to be undertaken. Research involves finding the companies and stock prices that would best suit the financial situation of the investor
The company profile needs to be studied and the size of the company is another important parameter of stock market investment research. Gathering information on the history of the company is another facet. Its history of profits and popularity and its performance in the past must be analyzed before investing in the shares of that company.
Research on the products and services of various companies is also very important. Investments should be made for the long term. This minimizes risk and increases profitability. Lastly, investment should be made wisely and regularly and this results from a good capital market research.
Secondary Capital Market • The secondary capital market deals with those securities that are already issued in an initial public offering in the primary market. Typically, the secondary markets are those where previously issued securities are purchase • In the secondary capital market, the securities are generally sold by and transferred from one investor to another. Hence, the secondary capital market needs to be highly liquid in nature.hased and sold.
A high transparency for the secondary market trading is also required. With the advancement of the technology, the trading concept in secondary market has changed substantially. In the earlier days, the investors needed to meet at fixed place in order to carry out the transactions. But now trading in secondary capital market has become much easier for the investors.
The capital market handles the trading of stocks and bonds. The secondary bond markets play a market place for the bonds that are already issued in the primary market while the secondary stock market trades those stocks that are already issued by the issuers. The treasury bills secondary market handles the trading of treasury bills.
The secondary market trading is vital for the capital market. A study in the secondary market trend can give some information on the investor's preference for liquidity. It means whether the investors want to invest their money for a short period of time or a longer period.
It has been seen that the investors in the capital market do not prefer to put their money for the long term investments. But the secondary market investors, however, can compensate their investments with proper strategy.
The secondary market value of a stock or a bond is different from their face value. This happens due to the fluctuating interest rates. The resale value of the bonds in the secondary market is based on the interest rates at that very time when the sale goes through. In a typical secondary market, when the interest rate falls, the bond value goes up while when the rate rises, the bond value goes down.
Capital market trends can be sub-divided into primary, secondary (short-term), and secular (long-term) trends. A technical analysis assumes the fact that movements of market prices follow a particular trend. They are periods when buyers consistently outnumber sellers; in other words, the bulls outnumber bears.
Primary trends include bull markets and bear markets. The bull market is a situation where investors buy in order to increase capital gains in the future. In a bear market, on the other hand, the investors anticipate losses and therefore they are obliged to sell. Price fluctuation is an important tendency of an open market. The Gross Domestic Product(GDP) and stock prices are on the rise during a bull market. A bear market exhibits negative trends; it can also be a prelude to recession.
Secondary market trends refer to price changes within a primary trend. These price changes are not permanent. A temporary decrease in price during a bull market is a correction. During correction, the price drop is normally 10% to 20%. The same percentage increase is experienced during the time of a bear market rally. This refers to a transient increase in price during the time of a bull market.
Secular market trends are long-term. They usually remain for a period of five to twenty five years. Many primary trends sequentially arranged result in a secular market trend. In such case, the bull markets are bigger and a bear market does not erase the gains of the previous bull market. In secular bear markets, the duration of a bull market is smaller.
Capital Market Reform • Capital market reform enables the capital markets to embrace new ideas and techniques affecting the capital market. Capital market liberalization is one such capital market reform that is adopted by various countries to strengthen their economy.
A capital market is a place that handles the buying and selling of the securities. This is the ideal place where both the governments and companies can raise their funds. The capital markets of all the countries have undergone a number of reforms in the history. Economic theories are made and implemented to reform the functionalities of the capital market. The prime objective behind all the policies and reforms was obviously to strengthen the capital market of a particular country as much as possible.
It has been always a big question to the economists whether to allow or not to allow the foreign investments in the country. Packaged with both advantages and disadvantages, the liberalization of the capital markets has always been controversial. In the 1980s and 1990s when the US Treasury and International Monetary Fund (IMF) tried to push world-wide capital-market liberalization, there had been enormous opposition. Economists were not in the support of free and unfettered markets.
Now, when the capitalist countries, developing capitalist countries, underdeveloped countries and a large number of socialist countries have nodded their support to the capital market reform and capital market globalization, the global capital market has evolved in a new identity. The concept of capital market is not restricted to the share and bond trading in the developed capitalist countries only but is equally influenced by the capital markets of developing and underdeveloped countries as well.
Now the economic or financial change in one country can affect the capital market of other country in real time. Almost all the countries are now exposed to the inter-country trades and inter-country investments. The use of internet and electronic media has added some more feasibility to the practice. Exchange of information is fast and accurate with internet. Another advantage of this system is that it brings the entire world in a single place. The capital market is one of the industries that enjoy the maximum facility of the internet service.
Capital Market Investment • The capital market investment makes the investors to buy or sell securities in the capital markets. The stock market and bond market are types of capital markets where investors can trade in stocks and bonds. The investments in the capital market may be either in the bonds or stocks.
Investments in the stocks or bonds may be either investing in the new issues or in the existing securities. The primary capital market handles the trading and investments in the new issues while the secondary capital market takes care of the trading of existing securities. There are a number of financial regulators that monitor the capital market dealings in order to protect the investors from fraud. U.S. Securities and Exchange Commission is one such financial regulator that regulates the capital markets situated in their designated countries for the best interest of the investors
Stock Investment • The investment in stocks may in six different styles. Depending on the needs and reasons of the investors, the efficiency of the investment is estimated. There are some investors who depend on the advice of other people while purchasing or selling a particular stock.
There are technical investors who spend time in studying the stock patterns before trading any stock. The economist investors take their decision of stock trading depending on the economic forecasts. They are in the nature to take risks and get benefited in return following an efficient market hypotheses. There are some other types of investors who rely on the information given by the researchers, vendors and trade executives to make investment in the stocks
There are value investors who try to value the stock independently of its market price. Finally, there are conscious investors who depend on their own measurements and beliefs while making any stock investment. Bond Investment
Bond Investment • Bond investment is different from that of stock investment. Bond investment is investing in the debt instrument that is issued by a company or government. The bond investor is actually lending money to the company while in return is promised to be paid the full principal amount plus a fixed periodic payout. The yield on the bond is calculated by putting together the final principal and total payouts received. The yield is the effective interest rate for the tenure of the bond.
Capital Market Assumptions • Asset allocation is one of the most important decisions related to investment in the capital market. There are a number of risk factors related to these investments, and because of this appropriate capital market analyses are necessary. There are firms which provide capital market investment solutions to investors, each making their own risk and return calculations, or capital market assumptions.
These assumptions are followed strictly when making suggestions to the clients regarding the asset allocation. Many companies also provide their clients with their capital market assumptions so that the clients can evaluate their own investment decisions
