Capital Market Efficiency

What It Means to Have an Efficient Capital Market

            An efficient capital market refers to a set-up where information on the value of securities is officially and accurately amalgamated in real time. Its primary purpose is to enable financial practitioners to stay abreast of any fluctuations that may occur and reflect in current pricing (Barnes, 2016, p. 56). Thus, an efficient capital market reflects relevant pricing data that enables investors to make accurate predictions before venturing into a particular enterprise.

Read also Difference Between Money Markets and Capital Markets

Describe the Behavioral Challenges in Achieving Efficiency 

 Behavioral finance explores any possible impediments that may emerge while endeavoring to achieve market efficiency.  One of the foremost challenges to achieving efficiency is irrationality in the financial market. Even though most venture capitalists intend to achieve a certain level of diversification, their expectations may be far removed from the reality. In other instances, investors may choose to trade regularly without tax minimization in mind. Moreover, financial crashes and bubbles also present a constant threat to achieving capital market efficiency. Short stints of high revenue growth and subsequent inferences by investors lead to poor choices and rampant mispricing. Additionally, earning surprises may defer any efficiency that would have been achieved in the capital market owing to unexpected differences between current and quarterly earnings.

Discuss Three Forms of Market Efficiency 

The efficient market hypothesis outlines three forms of market efficiency. Firstly, the weak form posits that current stock prices are a true representation of information recorded on past pricing trends and that technical procedural analysis cannot aid venture capitalists when seeking to make informed decisions. Secondly, the semi-strong form suggests that venture capitalists cannot use procedural or fundamental analysis to gain an upper hand in the market. The main reason why this is so is due to the public nature of the data used to calculate the current price.  Thirdly, the strong form version is formulated around the assumption that all information is accounted with regard to prevailing prices. This scenario, therefore, means that no investor has an edge over their competitors. .

What are the Implications to Corporate Finance? 

Market efficiency has a significant impact on the decisions made by participants. Major players are typically forced to determine an accurate representation of their company’s intrinsic value to price securities. The market has generally been known to price securities accurately and judiciously with the appropriate data (Mama, 2010). By so doing, corporate finance benefits from a scenario where undervalued stocks are virtually nonexistent and assured at every particular instance owing to equal prices. Nevertheless, there are instances where the market might overstretch economic changes, leading to price fluctuations. Investors now have to make sure that they have an elaborate understanding of the market since a wealth in knowledge and data does not always aid when predicting prices. 

Would you consider the Real Estate Market an Efficient Capital Market? Please explain why or why not

The real estate market is not efficient. Pertinent information is typically unavailable and the prevailing prices fail to accurately represent the facts as they are.  There are numerous documented instances where prices, initially purported to be correct, present constant challenges for investors due to multiplicity. The “highest and best” thus becomes a common phenomenon because of the existence of multiple market prices.  Furthermore, real estate will be available in great abundance in the near future as population increases, potentially leading to a price drop. One need not look far than into the real estate market information available on online agency websites. It is common to come across property on sale at “bargaining prices” that can even go down after a series of intense negotiations. This essentially represents a market steeped in inefficiency that can be manipulated by astute venture capitalists.

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