Chapter: 3 How Securities are Traded?

Section: 8 The Characteristics of an Efficient Market

Since investors have the opportunity to invest in more than one market, it is important to have a fair understanding of the criteria on which markets can be compared. Following are features of an efficient stock market:


I. Efficient system to facilitate trading
A good market should operate smoothly and efficiently in terms of operation. Buyers and sellers should be able to meet their expectations without any time delays or difficulties.


II. Availability of information
Timely information plays a vital role in decision-making relating to investments in stocks. Information on share prices, volumes and bids of transactions should be available on time without any difficulty.


III. Liquidity
Liquidity in this context refers to the ability to buy or sell shares quickly at a known price that is not substantially different from the price a moment ago.


IV. Transaction Cost

An efficient market should be cost effective to the investors. In other words, transaction cost should be minimal. The transaction cost includes brokerage, cost of trading in the market and cost of transferring the ownership of the stock.


V. Information Processing Efficiency
One of the most critical and important attributes of a good market is its information processing capability. The market price should adequately reflect all information relating to the stock. This also means that the market should swiftly adjust prices to new information relating to stocks.