Characteristics of the Stock Exchange Market

We can distinguish four characteristics that permit the stock exchange market to outstand from the rest.

  • First, at least in theory, it’s a perfect market. The considerations for the stock market of being perfect is due to the fulfillment of three basic requirements:
  • Each investor knows at what best price to sell or to buy
  • Any participant has access to the same information
  • No operator has the power to influence on the prices of the securities

Though it is well to remark, that however, in the practice it isn’t a totally perfect market due to certain circumstances that prevent it, such as is the possible existence of privileged information.

If the participants to the market don’t have the same kind of access to the information. Then the stock exchange stops being a perfect market due that the members that operate in it don’t have equal conditions. The use of this privileged information can cause the use of arbitrage operations, which objectives are to obtain more profits.

An example would be: Lets suppose that a company that in the next nine months is going to do an important acquisition inside its same sector. To put it more concrete, lets imagine that a banking institution is going to take control of another bank on another country, both of this banking institutions are very important in their own countries.

At first, this acquisition will provoke a rise in the stock price of the first banking institution.  If certain agents would know this information before the general public does (privileged information) the best business they could do is to buy the stock of the foreign banking institution before the interested banking institution does the acquisition and then to sell them after the operation has been made and the stock has raised its quotations. These agents would have use of privileged information to obtain profits by a simple operation of arbitrage.

In general terms the arbitrage, is a operation that consists in buying and selling assets simultaneously with the object of obtaining benefits by using privileged information and by taking advantaged of certain inefficiencies of the market.

These transactions can have place on different markets, with different kinds of assets or with a same asset with different dates of expiration.

  • It is considered as a free market. Legally its an institution administrated by a limited company and were the government only has to do supervision functions, in a way that they collaborate for a better functioning of the market.
  • Its acts as an efficient market. Permitting the new available information to have immediate effects on the changes. Causing this way the continuous oscillations on the prices of the securities.
  • It is a transparent market. This characteristic permits the public in general to have the possibility to know all the existing trading biddings on the market.