Financial Markets

Any mechanism organized for trading financial

assets or liabilities is termed financial market. It
is a market in which financial assets and
liabilities are traded. Financial assets are all
forms of securities ranging from common stocks
to derivatives.
 Types Of Financial Market
• In general terms, there are 6 main types of
financial Market dealing with International
and domestic Trade:-
• *Equity market
• *Debt market
• *Euro Market
• *Money Market
• *Derivative Market
• *Foreign Exchange Market
What is Efficiency…?
• The word efficiency is part of everyone's
vocabulary. To most, it means the ability to
achieve a desired result without or with
minimum wasted energy or effort. To Encarta
dictionary, 2009, it is the ability to do
something well or achieves a desired result
without wasted energy or effort, i.e. to degree
to which something is done well or without
wasted energy or effort.
Financial Market
Efficiency
• It relates to pricing and information efficiency,
the efficiency of substituting funds for
financial market instruments. It has to do with
how fast and convenient asset can be
transformed into cash and vice versa, how
prices of securities are determined and how
risks inherent in such securities are managed.
• The two major determinant of
efficient Financial Market are:

• *Price
• *Information
• Pricing OF the Security –– pricing of security
can be discussed in relation to Risk and return.
Risk is seen as as the probability of the
deviation of the return expected from holding
a security from the actual return from the
holding of such securities. With the
introduction of risk, an investor will be
indifferent as to which security to invest in
when there are availability of investment
having similar returns.
• Information On Securities : Information can
be classified as historical, current or forecast.
Only current or historical information is
certain in its effect on price. The more
information that is available the better the
situation meaning that informed decisions are
more likely to be correct. Security prices are
characterized with random and unpredictable
movements.
 Market Efficiency Level

• Market efficiency as regards the availability of

information is reflecte in Efficient Market
Hypothesis (EMH) in three basic forms;
• 1. Weak-form efficiency -Prices of the
securities instantly and fully reflect all
information of the past prices. This means
future price movements cannot be predicted
by using past prices.
• 2. Semi-strong efficiency - Assets prices fully
reflect all of the publicly available information.
Therefore, only investors with additional
inside information could have advantage on
the market.

• 3. Strong form of efficiency - It is concerned

the fact that securities prices reflect all
published and unpublished public and private
information. This implies that people with
private or inside information will be able to
outperform the market at this form.
 Insight of Equity Market
• Equity Market compromises of stock market,
which involves trading of
shares/equities/stocks and is the major source
of equity capital for the company.
• Stocks are first issued to the investors through
primary or new issues market, further these
stocks are traded or resold on secondary
market commonly known as stock exchange.
• Analytical view on major types of Stocks:
• Ordinary Shares – It has weak form of financial
efficiency as shares or securities are listed in
the stock exchange(secondary market), which
reflects all information contained in the past
price movements which makes it impossible
for an investor to predict future security prices
by analysing historical prices and achieve a
better result than the stock market itself.
• Preference Shares – These are generally safe
investment as involvement of risk is less. As
dividends on preference share is paid, no
matter how well the company performs.
• So from my point of view it hold the semi-
strong efficiency market as most of
information is available in time of purchase.
• Some Efficiency views on Money Market
Instruments:

• Certificate Of Deposits - Time deposits, commonly by

banks, thrift offered to consumers institutions, and
credit unions.
• Treasury Bill - Short-term debt obligations of a
national government that are issued to mature in
three to twelve months. For the U.S., see Treasury
bills.
It seems all are semi-strong or might be strong
efficiency as most or almost all information is
available.
 A view on Forex Market
• Major players in forex market is Basically
• Bank
• Central Bank
• Commercial Companies
• Forex Fixing(Forex fixing is the daily monetary exchange
rate fixed by the national bank of each country. The idea is
that central bank use the fixing time and exchange rate to
evaluate behavior of their currency.)
• According to me they all holds weak efficiency market as
exchange rates fluctuates where as the investors/buyers
depends on hedging and speculation to overcome the
inadequate information barrier to make profit.
 Conclusion
• End of this slide we will be able to categories any financial
instruments in financial market on the basis of Efficient
Market Hypothesis (EMH) in three given forms:
• Weak efficiency
• Semi-strong efficiency
• Strong efficiency
• The general assumption underlying an efficient market
therefore implies that prices of securities in the market
must reflect sufficiently enough information to allow
investors make informed decisions about investment in
such markets.