Lecture Two
Stock Markets &
Efficiency
1
,Learning Objectives
At the end of this session you should be able to:
▪ Discuss the functions and benefits of a stock
market
▪ Understand the difference between technical
analysis and fundamental analysis with
relevant examples
▪ Define the three levels of market efficiency
▪ Understand how to test for efficient markets
▪ Discuss the evidence on market efficiency in
2
practice
,The Financial Market
❑ Financial markets are places where those that have
money (the investors) and those that need the money
(the companies) can get together
❑ Securities are issued by companies (and governments!)
and bought and sold by investors
❑ The securities can be traded in three ways:
▪ Primary Market
▪ Secondary Market
3
▪ Over The Counter Market (OTC)
, The Financial Markets
❑Primary Market: The primary market is where securities are
created. It's in this market that firms sell new stocks and bonds
to the public for the first time. Initial Public Offering (IPO)
occurs in this market.
❑ Secondary Market: In this market investors trade previously
issued securities without the issuing companies' involvement.
The secondary market is what people are talking about when
they refer to the "stock market” such as New York Stock
Exchange (NYSE), Nasdaq and all major exchanges around
the world.
❑Over The Counter Market: A decentralized market, without a
central physical location, where market participants trade with
one another through various communication modes such as
the telephone, email and proprietary electronic trading
systems. 4
Stock Markets &
Efficiency
1
,Learning Objectives
At the end of this session you should be able to:
▪ Discuss the functions and benefits of a stock
market
▪ Understand the difference between technical
analysis and fundamental analysis with
relevant examples
▪ Define the three levels of market efficiency
▪ Understand how to test for efficient markets
▪ Discuss the evidence on market efficiency in
2
practice
,The Financial Market
❑ Financial markets are places where those that have
money (the investors) and those that need the money
(the companies) can get together
❑ Securities are issued by companies (and governments!)
and bought and sold by investors
❑ The securities can be traded in three ways:
▪ Primary Market
▪ Secondary Market
3
▪ Over The Counter Market (OTC)
, The Financial Markets
❑Primary Market: The primary market is where securities are
created. It's in this market that firms sell new stocks and bonds
to the public for the first time. Initial Public Offering (IPO)
occurs in this market.
❑ Secondary Market: In this market investors trade previously
issued securities without the issuing companies' involvement.
The secondary market is what people are talking about when
they refer to the "stock market” such as New York Stock
Exchange (NYSE), Nasdaq and all major exchanges around
the world.
❑Over The Counter Market: A decentralized market, without a
central physical location, where market participants trade with
one another through various communication modes such as
the telephone, email and proprietary electronic trading
systems. 4
