Inefficiencies & Stock Market

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Inefficiencies within the Stock Market

Inefficiencies within the Stock Market


Stock market has experienced massive ups and downs in the past decade. These events have affected their value and future estimates. Stock market is among those significant sources for a company through which they can raise huge amount of money. This permit the business to be publicly traded and lift additional finance for the purpose of expansion through selling shares or portion of ownership of the company to the public in the public market. The liquidity of this market yields the investor's ability to easily convert their shares in to the money by selling the security in the capital market. This is the most attractive characteristic for investing in the stocks comparing to other less liquid investment like real estate. Nevertheless, every attractive investment has drawbacks so the stock market has. In recent years, due to the financial crisis, majority of the capital market has been suffered a lot; hence result in the inefficiency in the stock market.

In this paper, we will discuss the recent inefficiencies within the Stock market and this inefficiency will be linked with the theories such as equilibrium theory, Net Present Value, portfolio theory, Efficient Market Hypothesis and also with the Arbitrage process. Moreover, the difficulties faced by the managers in making corporate decisions.


Perfect Markets

Perfect markets are efficient in allocating resources. This means that in perfect markets all prices are in line with the producers and investors marginal rates of return, which result in the financial allocation of investments that can benefits everyone.

Perfect markets are those in which:

No transaction costs in negotiating property

The information is free and is received by all individuals at the same time

The actions of economic agents have no effect on prices

No firm or individual has the opportunity to earn returns extraordinary investment

All individuals seeking to maximize their utility in a rational

Perfect markets are also operationally efficient. This means that there is any obstacle to the execution of transactions. This is expected to assume that transaction costs are zero (Tudor D., 2011, pp. 1105).

Efficient Market

This market defined as those that reflect efficiency of the markets in full and instantly availability of entire information. This is to be notice that how a condition is less restrictive than that of perfect markets. Perfect markets are necessarily efficient; nevertheless, efficient markets are not necessarily perfect. Given this definition of efficiency the question arises of how the process is reflected in the markets through the available information.

Rational Markets

Rational Markets have to be differentiated from the efficient markets. A market is rational when their prices accurately reflect the expectations of investors on the PV of cash flows. For a market to be rational required:

Investors process the available information to form their expectations and determine “reasonable” values

Prices are the result of the interaction between investors in the market which is based on the values ??assigned according to their analysis

The arbitrators ensure at ...
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