Unit -10 Market For Common Stock

 Transaction Costs
• Transaction costs represent the expenses incurred by investors
at the time of buying and selling of securities.
• Transaction costs affect the return on investment. Higher the
cost lower will be the rate of return. There are two categories
of transaction costs.
1. Explicit Costs
• Explicit costs are the direct costs of trading securities. The
major explicit costs involve brokerage commissions. Besides
the brokerage commissions other explicit costs include the
taxes and transfer fee.
• Transaction costs in Nepal for equities.
Price Range costs
Up to 50,000 0.6% of transactions amount
Above 50,000 -500,000 0.55% of transactions amount
Above 500,000-2,000,000 0.50% of transactions amount
Above 2,000,000-10,000,000 0.45%of transactions amount
Above 10,000,000 0.40%of transactions amount

2. Implicit Costs
• Implicit costs are indirect cost of transaction. They appear in
the form of impact cost, timing cost and opportunity cost.
Basic Functions of Stock Market
• A Stock market is a secondary market that allows trading of
stocks among investors. Investors have to contact brokers in
stock market and open account for buying and selling of
stocks.
• There are two basic types of stock markets, Organized stock
market and over the counter market. Basic Functions of stock
market are follows.
1. Price Reporting
• Stock market regularly reports the price of the stock traded in
the market.
• The price reporting refers to the dissemination of real time
trade and quote information about the market.
2. Regulation
• An effective functioning of stock market is directed by
regulatory mechanism in the stock market.
3. Clearance and Settlement
• After completion of stock trade, there is exchange of shares
and cash between buyers and sellers.
• In Nepal T+3 days system has implemented for clearing and
settlement. CDSC provides the clearance and settlement
services.
4. Tick Size
• The minimum price movement of stock is called a tick size. It
also refers to the movement in price of security from one trade
to another.
• In Nepal, only 2% can change in stock price from one trade
and another. The stock price can change up to 10% in a day.
5. Block Trade
• Buying and selling of large number of shares at a
predetermined price.
6. Price Limits
• Stock market also sets the price change limit to prevent the
market from being artificially volatile.
• NEPSE applies the index based circuit breaker system at
three stage of the NEPSE index movement of 4%, 5%, and
6 %.
 Pricing Efficiency of the Stock Market
• The notion that stocks already reflect all available information
is referred to as the pricing efficiency of the stock market.
• Pricing efficient market is one in which stock prices fully reflect
all available information. In pricing efficient market, stock
prices adjust rapidly to the arrival of new information.
1. Forms of Pricing Efficiency
a. Weak form efficiency
• the weak form efficiency of pricing efficiency assumes that
information contained in past price and trading history of
securities is fully reflected in current stock prices.
b. Semi strong form efficiency
• The semi strong form efficiency assumes that stock price adjust
rapidly to the release of all public information. In other words,
current price of stocks fully reflect all public information.
c. Strong Form efficiency
• The strong form efficiency states that current market prices
reflects all information, whether publicly available or privately
held.
Form Market Price Effect
Past market information Public Private
information Information
Weak  . * *
Semi Strong  .  . *
Strong  .  .  .