Investing in low
liquidity assets like art, antiques, stamps, and coins is generally considered to be a hobby
rather than an investment. This viewpoint comes from the fact that most of these investments
require a great deal of specialized knowledge and expertise to be truly profitable. These
investments usually offer very low market liquidity, high transactions costs and high price
variability.
1.A: Organization and Functioning of Securities Markets
a: Describe the characteristics of a well-functioning securities market.
1.
Provide timely and accurate information on the price and volume of past transactions
and on the supply of and demand for current goods and services.
2.
Provide liquidity. Liquidity is the ability to buy or sell quickly at a known price. Liquidity
requires:
•
Marketability–being able to sell quickly.
•
Price continuity-prices that don’t change much from one transaction
to the next in the absence of new news.
•
Depth-there are numerous buyers and sellers willing to trade at
prices above and below the current price.
3.
Internal efficiency, which means getting the lowest possible transactions cost.
4.
Informational or external efficiency, which means prices rapidly adjust to new
information so that the prevailing market price reflects all available information
regarding the asset.
b: Distinguish between primary and secondary capital markets and explain how secondary
markets support primary markets.
Primary capital markets relate to the sale of new issues of bonds and preferred and
common stock.
Secondary financial markets are where securities trade after
their initial offering. Secondary markets are important because they
give investors liquidity. Liquidity enables investors to sell quickly.
The greater the liquidity securities have, the more willing investors
are to buy securities. Liquid secondary markets also provide
investors with continuous information about the market price of
their securities. The better the secondary market, the easier it is for
firms to raise external capital.
c: Distinguish between call and continuous markets.
•
Call markets are markets in which the stock is only traded at specific times. All
trades, bids, and asks are declared, and then one negotiated price is set that clears
the market for the stock. This method is used in smaller markets and to set the
opening price in major markets.
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