Understanding of various outcomes which are associated with models of financial markets.
- Explanation of operation financial markets and their importance.
- Explantation of key theories and models of financial markets.
- Analysis of efficacy of financial markets.
Financial markets are crucial for meeting requirements of the borrowers in effective way. Present report deals with importance of money and capital market collectively financial markets which is required by organisation and economies to meet funds' requirement. M&S (Marks & Spencer) Company is chosen which is engaged in retail industry and historical share prices are taken out to analyse performance. Different forms of EMH are explained and efficiency of LSE stock market is discussed as well. Potential risks in international market is analysed along with forward foreign exchange markets. Eurocurrency market is explained and its usefulness in conducting global trade transactions. Thus, financial markets are vital for channelising funds in effective manner.
Q1 A) Different level of market efficiency
The EMH (Efficient Market Hypothesis) is effective market in which current price of shares are listed which help to clarify investors whether they should invest in the particular company or not. This is essentially required so that investment may be made in that organization which could provide higher returns to them by injecting operations quite effectually. EMH forms of market was developed by Eugune Fama in 1955. He stated that stock of the company are traded at fair only. This cannot be used for carrying technical analysis and as such investors cannot decide either to sell shares at inflated price or purchase the same at undervalued prices. In relation to this, investors have no other option to make riskier investment. The different forms of market are weak, semi-strong and strong which can be explained below-
1. Weak form-
This form of market is termed as weak as no concrete information is incorporated in current share price of firm which can be used by investors to carry out analysis of viability of organisation (Slabinski. 2016). It is called as weak form as historical data related to shares is present which lays inaccurate information to investors. This cannot be used to make technical analysis as both private and public related data are not included in current stock price instead only past data is present which makes difficult for shareholders to assess efficiency of firm's performance. The main example of this market is that just by relying historical variations of price of M&S Company, prediction of future cannot be made as no value can be garnered through such variations.
2. Semi-strong form-
This market is much relevant in comparison to weak form because publicly available information is traded in the current stock of prices. It is helpful as accurate information which is made available to public are incorporated in. The public information relates to financial statements reflecting net earnings of firm which is beneficial as stock price data can be presented to investors. In addressing to this, no delay is made with relation to disclosure of data. Moreover, partly private information is disclosed in share price data as well (Armour, Mayer and Polo, 2017). For instance, when M&S Company releases net income, stock price tend to change after trading hours in the share market.
3. Strong form-
This form of market is termed as strong form as both public and private information are incorporated in share prices in the best possible manner. It is helpful to assess efficiency of organisation's performance as accurate price of stock is disclosed which is useful for the investors to easily conduct technical analysis of the market in effective way. Private information means that it is confidential one and is known to top management only. It is available within the hands of Board of Directors like future issue of equity shares and internal information. For instance, M&S Company's management is planning for further share issue and as such, current prices reflect true position of firm (Arthur, 2018).
B) Critically evaluate efficiency of London Stock Exchange (LSE)
The stock market is one where securities are traded in. LSE is one of the largest stock exchange and oldest as it dates back to almost 300 years since its formation. In this stock market, around more than 3000 organisation are listed from numerous nations for the main objective of trading and conducting businesses to earn huge profits quite effectually. Furthermore, it is a financial institution ahead of several largest markets in the world. In addressing this, efficiency of LSE can be analysed as more of the companies listed on the stock exchange are performing well enough and as such, it can be stated that LSE is one of bigger financial institution. Moreover, market capitalization of 3.5 trillion in the present year and efficiency can be seen. The trading base in terms of exchange is good as members are able to purchase and sell shares with much ease.
The EMH forms of market are discussed such as weak, semi-strong and strong which are important from the point of view of investors. Weak form states that historical data is incorporated in current share price and no technical analysis can be made. On the other hand, semi-strong form means that partly private and public information is disclosed. While, strong market implies that public and private both are incorporated in current share price (Baharumshah, Slesman and Devadason, 2017). It can be said that M&S Company is also performing well and stock prices are good as well. The theory on financial market can be explained which is APT (Arbitrage Pricing Theory). It states that return on asset may be judged and predicted by asset in hand and related risk factors. Basically, it is an asset pricing model which imparts risk in getting expected return on asset. This theory is just opposite to CAPM (Capital Asset Pricing Model) that is based expected return from the market. It can be assessed that market capitalization of M&S Company is good enough and shareholders are getting higher returns on the securities purchased by them in the best possible way.
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