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.

CHARACTERISTICS
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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