How to determine the efficiency of financial markets?

22 Feb 2019 04:33 PM

The stock market index measures the level of prices in the market. It is based on a sample of the shares of the enterprises that are traded in organized or unorganized capital markets or both. The sample is often chosen in such a way that the index can reflect the situation in which the capital market measured.

As long as the activity of the enterprises whose securities are traded in the capital market represents the bulk of economic activity in the country, and if the capital market is characterized by efficiency, the carefully designed indicator for measuring the overall market condition would be a mirror of the general economic situation of the country. Furthermore, stock price indices can predict the future economic situation before any change occurs before a period of time.

Capital market efficiency indicators

1- Market Volume Index:

It reflects the primary market, and is divided into the number of companies registered in the market and is presented through two methods (time development is increase the number of companies registered with the development of the state). The size of the market can also be measured by determining the volume of primary issues of GDP and reflects the volume of investments within the country.

2- Liquidity Index:

It reflects the secondary market and is divided into the turnover rate. It is determined by determining the turnover of the total issued capital. The lower the turnover rate, the lower the liquidity.

3- Concentration Index:

It is expressed through (the 10 most active companies in the stock exchange in terms of turnover), and in this index the degree of concentration whenever the value is high was worse.

4- Pricing efficiency:

This means that the prices of securities in the market reflect all variables such as (macroeconomic performance, problems within the sector to which the securities belong, the economic performance of the company to which the company belongs, and international crises).

5- Organizational and Institutional Chart Index:

There must be transparency and transparency of all stock prices and the results of listed companies, standardizing accounting standards to facilitate comparison between different companies, and investor protection laws.

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