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What are the attributes of a Perfect Capital Market?
The efficiency of a capital market is measured by the speed and disclosure of information in the market about the shares. The capital markets of advanced as well as some emerging markets are found to be fairly efficient. However, efficiency does not guarantee the fact that the market is perfect.
In order to be considered as a perfect market, the following conditions must be satisfied.
Absence of Entry Barrier
In order to be perfect, there should be no entry barrier in a capital market. Thereby, in a capital market, anyone can buy or sell shares without needing to fulfill any rules or regulations regarding the exchange of shares. Entry barriers would stop some investors from lending and borrowing some money. So, in a capital market, there should be no entry cost.
Large Number of Buyers and Sellers
There should be a large number of buyers and sellers in a capital market to make it perfect. There should be ample scope for each buyer to buy new securities and no single participant should be able to influence the market behavior. This fact implies that in no instance the market should be skewed towards a specific bury or seller in a perfect capital market.
Divisibility of Financial Assets
In a perfect capital market, the financial assets are divisible. It allowed all investors to buy assets irrespective of their affordability and desire. If securities and other financial assets are not divisible, it may impact the affordability of buyers and sellers in the market, making the market imperfect.
No Transaction Costs
In a perfect capital market, there is no transaction cost applied to the sale and purchase of securities. Everyone can buy and sell securities in the market at the share price and without any premium in a perfect capital market.
No Tax Differentials
In a capital market there should ideally be no taxes applied on the purchase and sale of securities. However, if taxes are levied, it should be homogenous and one set of buyers should not be preferred over another group of investors. This is so because tax differentials can create abnormal competition and offer some securities a leeway to be traded more than other securities.
Free Trading
In order to be perfect, there should be no restrictions in a capital market. The government should not stop anyone from participating in an exchange of securities in a perfect capital market. If the government stops investors from investing in the share market, it will create a barrier in the market which is not desirable in a perfect capital market.
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