NATIONAL ECONOMICS

UNIVERSITY
SCHOOL OF BANKING AND FINANCE
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CHAPTER 1
OVERVIEW OF SECURITIES MARKET

SECURITIES DEPARTMENT
 Contents
1.The formation and development of
securities market
2.Definition, classification and principles of
securities market operation
3. Participants in the securities market
4. Roles of securities market
1.5. The efficient market hypothesis

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1. The formation and development of securities market

• Governments revolutionize tax system in

order to boost saving and investment
• A wide range of new financial
instruments
• Unofficial securities market has been
formed
• Technological innovation : the
dissemination and storage of information
today is broader, cheaper, faster, and
more accurate
• Modernization of government debt
market
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1.2.Definition, classification and principles of securities
market operation
• Modern market is characterized by the
securities market
• Securities market is a component of
financial market in which securities can be
bought or sold. These trades are
executed based on predetermined rules.
• Security is a certificate that represents a
claim on the issuer

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 Types of securities market

According to
market
organization

OTC: Over The

Exchange
Counter Market

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 Types of securities market

According to
capital flow

Primary Secondary
Market
Market
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Relationship btw prim and sec market: The primarymarket cannot function without the
secondary market. The secondary market provides liquidity for the issued securities.
The issued securities are traded in the secondary market offering liquidity to the stocks
at a fair price.
The primary market provides a direct link between the prospective investors and the
company. By providing liquidity and safety, the secondary markets encourage the
public to subscribe to the new issues. The marketability and the capital appreciation
provided in the secondary market are the major factors that attract the investing public
towards the stock market. Thus, it provides an indirect link between the savers and the
company.
The stock exchanges through their listing requirements, exercise control over the
primary market. The company seeking for listing on the respective stock exchange has
to comply with all the rules and regulations given by the stock exchange.
Though the primary and secondary markets are complementary to each other, their
functions and the organizational set up are different from each other. The health of the
primary market depends on the secondary market and vice versa.
 Types of securities market

According to
different types
of securities

Derivative
Bond Markets Stock Markets
Markets

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1.3. Participants in the securities market
• An issuer is a legal entity that develops, registers
and sells securities to finance its operations. Issuers
may be corporations, investment trusts, or
domestic or foreign governments.
• An investor is someone who buy or sell securities
in the market
– Individual investor
– Corporation investor
• Intermediaries
– Securities company
– Commercial bank

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1.3. Participants in the securities
market
• Authority agency and other supporting
organizations agency
- Government Securities
(State Commission)
- Stock exchange
- Securities Investment Board
- Securities depository
- Credit ratings agency

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 1.4. Roles of securities market
• For the economy and Government
• For issuers
• For investors

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 1.4. Roles of securities market
For issuers
• New capital mobilization channel with
reasonable cost
• Boost the corporation equitization
• Create healthy competition in order to
promote capital efficiency, apply new
technologies and improve products
• Internationalization of securities
market
• Seperation between ownership and
management
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 1.4. Roles of securities market
For investors
• Analyze and create suitable portfolios
• Investment culture
• Provide investor healthy competition with plenty
of investment opportunities
For the economy and Government
• Capital mobilization
• Tools for implementing monetary policy and
fiscal policy
• Attract foreign direct and indirect
investment
• Effective channel to raise capital
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 1.4. Roles of securities market

• Asymmetric information
• Speculation
• Insider trading
• Market manipulation
• Conflicts of interest

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 1.5. The Efficient Market Hypothesis
• The expectation theory
• The efficient market hypothesis
• Empirical test

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 1.5. The Efficient Market Hypothesis

Securities The expectation The Efficient Market

theory Hypothesis
valuation

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 1.5. The Efficient Market Hypothesis
The expectation theory
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 1.5. Efficient Market Hypothesis
• The efficient markets hypothesis (EMH)
contends that information relevant to the
pricing (valuation) of loans, securities, and
other financial assets is readily available to
all borrowers and lenders at negligible
cost
• Patel (1984) points out that once the
dividend announcement is released,
almost all of the stock prices will reflect
that information within 10 minutes

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 1.5. Efficient Market Hypothesis

Sub-hypothesis
Weak-form Efficient Market

Semistrong-form Efficient Market

Strong-form Efficient Market

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 1.5. Efficient Market Hypothesis
Weak-form Efficient Market Hypothesis
• The weak form of the EMH argues that the
current price of a financial asset already
reflects all its price and trading volume history
• No use of trend analysis
• Historical price is public and available to all
investors
• Assume that historical price can be used to
predict future price, investors can exploit that
information intermediately

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 1.5. Efficient Market Hypothesis
Semistrong-form Efficient Market Hypothesis
• The semistrong form contends that the current
price of a financial asset already reflects all
publicly available and relevant information.
• Apply fundamental analysis or technical
analysis brings no abnormal returns

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 1.5. Efficient Market Hypothesis
Strong-form Efficient Market Hypothesis
• The strong form argues that the current
price of a financial asset already captures
all relevant public and private
information.
• No abnormal returns
• Passive portfolio management strategy

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 Empirical results
• Weak-form Efficient Market Hypothesis
testing: Statistical Tests for Independence
and Trading tests
• Semistrong-form Efficient Market Hypothesis
testing: Time series analysis and Event
study
• Strong-form Efficient Market Hypothesis
testing: Insiders, Exchange

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 Conclusion
• Securities market structure
• Roles of securities market
• Securities market participants
• Efficient Market Hypothesis
• Requirements of securities market
development

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