Friday, 28 April 2017

Characteristics of a Well-Functioning Financial System

Timely and accurate information on the price and volume of recent transactions.  If timely information is not available, a seller may not get the best possible price and a buyer may end up paying too high a price.

Liquidity, which refers to the ability to buy or sell the asset quickly, at a price close to that of a recent market transaction, assuming no new information has been received.  To achieve price continuity, the market must be significantly deep.

Internal efficiency in that there are low transaction costs, which include the costs of reaching the market and brokerage costs.

External or informational efficiency, which is achieved when market prices reflect all external available information about an asset.  Prices should rapidly adjust to reflect any new information.

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