What is an Efficient Capital Market?
A market where information regarding the value of securities are incorporated into its prices accurately and in real time. Since the value of securities fluctuates and reflect its present intrinsic value, an efficient capital market enables these fluctuations to be reflected in the securities’ current price.
An efficient capital market is one where share prices change and adjust rapidly according to the changes in information. If we talk about capital market efficiency of Apple Inc. stock, when there is a big announcement like a new iPod or a new iPad coming out, you may witness an efficient market reaction where the stock price goes directly up to a new level. This is called the efficient market reaction where prices instantaneously adjust to fully reflect the new information. There are three types of capital
- Strong form efficiencies – where all information of every kind is reflected in stock prices;
- Semi-strong form efficiencies – where all public information is reflected;
- Weak form efficiencies – where current stock prices just look at its own past prices.
Efficient Market Hypothesis (EMH):
According to the famous efficient market hypothesis, stock prices cannot be predicted through their past trends when the stock market is informationally efficient. This means that reacting to all the information available makes an efficient market dynamic and unpredictable.
Is Australian Capital Market efficient?
Over the past few years, Australian capital market is considered to be the paradise of stockbrokers and portfolio managers, helping them to predict stock prices with due accuracy and serving an alpha to their clients. The major reason behind this increased opportunity is that the Australian capital market is becoming less and less dynamic so that any new information does not necessarily affect the stock prices.
Hence, Aussie stock market is witnessing a semi-strong to the weak form of market efficiency. There are three underlying causes behind this phenomenon:
- Reduction in research coverage by Australian companies and particularly by fund managers. Ever since the Global financial crisis, research firms have encountered higher regulatory costs, lower revenues and ultimately earn lower profits. To lower their cost in this ever-increasing competition, they may not hire qualified staff and analysts to research & study the capital market dynamics. Thus, the time spent by each analyst for one company is declining resulting in lower quality research papers and data available for equity/capital markets in Australia;
- Increase in the flow of capital towards indexing: This second trend is increasing both in global and local levels. Through indexing, the investors can manage their investment portfolio with passive strategies. Allocating their assets in indexing instead of stock investment means that the effects of market dynamics is relatively lower on the fund portfolio.
- The surge in DIY investors enticed by cheaper brokerage rates and with a plethora of online company information available to them there by making their own investment decisions, buying their own shares and holding those investments through thick and thin. Many of these investors also have busy lives and wouldn’t be classed as sophisticated industry professionals who have the time and experience to manage their portfolio if the lemonade stand turns sour to achieve the highest returns possible in this rapidly changing market.
Duties of Portfolio/fund managers:
Portfolio/fund managers have several duties & responsibilities even in most efficient markets. One of their major responsibilities towards investor is to identify all the risks and returns from a stock. Rational portfolio managers are also required to assess the investor’s limitations of liquidity, horizon, time, taxes, corporate regulations, preferences and age. They should tailor the portfolio according to the circumstances and particular requirements of the investor.
“Excellent Investor” is one such investment manager who works for the growth and benefit of their client. At Excellent Investor, we provide general advice on our sophisticated financial products to individuals and corporate clients. With a team of qualified investment analysts, we aim to help our esteemed clients invest their hard-earned money in the best possible way.
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