Efficient capital market
Describe the behavioral challenges in achieving efficiency.
There exist various ways through which business activities can be carried out. People are
uniquely different and therefore come up with unique creativities and business ideas. A capital
market is a term that is not new to many people in the field of business. It is simply a financial
market which operates as a conduit for the demand and supply of both the equity and debt
capital. In this type of market, the buyers and the sellers are engaged in trading of the various
financial securities which includes stocks and bonds. The activities of buying and selling are
usually carried out by institutions and individuals. Most institutions or individuals do show
various signs when they achieve efficient capital market, but in some cases, some behavioral
challenges inhibit achieving this efficiency.
An efficient capital market is achieved in a scenario where the institutions can channelize the
surplus funds from the savers to their institutions after which they invest them into some
productive use. On the other hand, efficient capital market represents an ideal market whereby
the prices of the securities provide an accurate signal for the resource allocations. The behavioral
biases are a big challenge in achieving efficient capital market. This is where some individual
investors tend to trade what is more than good for them. Other challenges are the limits of
arbitrage act in opposition to market efficiency and constraints that are placed on the investors by
the risk aversions. A tag of war will, therefore, be created between the fundamentals and the
stock prices by the trading behavior of these two constituents.