The following section focuses on how the markets themselves function. Understanding how the markets function is key in determining how securities themselves function.
It is unlikely that your CFA Level 1 exam will test you directly on the topics presented, as the material itself is quite simplistic. However, you will be asked several comprehensive questions on this material.
The characteristics of a well-functioning securities market are:
- Efficient - Internal - Markets must be efficient internally.
- Efficient - External - Markets react quickly to new news; existing prices reflect all available information.
- Liquidity - Markets are liquid and as such, assets can be bought or sold easily. There are numerous buyers and sellers giving depth to the market.
- Continuity - In the context of liquidity, prices do not change substantially from one transaction to another unless significant new news arises.
- Marketability - In the context of liquidity, marketability is the ability to sell an asset quickly.
- Timely and accurate information - New information is brought to the market in a timely and accurate way.
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