Analysis of Financial Markets: Efficiency, Risks, and LSE Report

This report provides a detailed analysis of financial markets, with a specific focus on the London Stock Exchange (LSE). It begins by distinguishing between different levels of market efficiency, including weak, semi-strong, and strong forms, and discusses the efficient market hypothesis. The report then critically assesses the efficiency of the LSE, examining its operations and performance. It covers the role and function of the capital market and evaluates potential risks in international transactions. The report also explores the purpose of regulating foreign markets. The report includes graphs and charts illustrating inflation rates, bank rates, policy rates, bond rates, and bond prices to provide a comprehensive overview of the financial market dynamics. Overall, this report offers valuable insights into the operations and efficiency of financial markets, making it a useful resource for understanding market dynamics and risks.

Financial Market

Table of Contents
INTRODUCTION...........................................................................................................................1
Q1: (a): Distinguish among various levels of market efficiency............................................1
(b): Critically assessment of “efficiency” of the London Stock Exchange (LSE) market....4
Q2...................................................................................................................................................12
(a): Role and function of capital market...............................................................................12
Q.3..................................................................................................................................................14
(a): Critical evaluation of potential risks in international transactions.................................14
Q4...................................................................................................................................................17
Purpose of regulating foreign market:..................................................................................18
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................19

INTRODUCTION
Financial market is place where people trade financial securities, bonds and some other
underlying assets that reflect total supply and demand at that particular period of time. It includes
precious metals and other agricultural products. It a wider term that describe any marketplace
where trading can be done in accordance with currencies and derivatives occurs. Cost in a
financial market that are determine by making specific changes in the rules and regulations. This
particular project is providing crucial information about different operation of financial markets
and valuable important to an individual or company's (Takayasu, 2013).
There are certain theories and methods those are being used in financial markets which
consists of efficient market hypothesis as well as their related implications. Analysis of
operations and efficiency of financial markets are discussed under this report. To determine and
collect valuable financial information and indices that consists of share prices to operate proper
analysis of operations as well as their efficiency in the marketplace.
Q1: (a): Distinguish among various levels of market efficiency
An 'efficient market is state as an appropriate market in which they are large number of
rational, profit maximization actively competing with trying to predict future market value of an
individual securities. In efficient market, competition between many intelligent participants that
lead in any tough situation, where at any stage the actual prices of individual securities already
that reflect the effects of data. In other words, in an efficient market is a point in time the actual
prices of securities will be positively estimate intrinsic value. There are mainly three level of
market efficiency. Some of them are discussed underneath:
Weak form efficiency: In this the prices of the securities instantly reflect all data of the
past prices (Breedon, Chadha and Waters, 2012.). It included future price movements would not
be estimated by using last year prices. All data related with past on inventory prices is of no use
in predicting upcoming stock prices deviations.
Semi-Strong efficiency: It is refers as assets price which is fully reflect every publicly
published data. Henceforth, only investors and other stakeholders with extra inside data would
have plenty of benefits in the market. It has been determine that strong form is theoretically
related with persuasive, then the semi-strong from past request that is present in our common
senses. It says that the market will be quickly digest publication of related information through
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moving prices fluctuations to a new equilibrium level that varies from overall supply and demand
that causes by emergence of data.
Strong form efficiency: It is known as price of asset that is fully reflect every public and
internal information that are available to the company. Henceforth, no other one have a benefit in
the market in predicting cost thus there is no information which would be provided at any extra
value to outside stakeholders and investors. In case the current market prices is lower than the
value cost which is justified by some other piece of private data (Mayntz, 2012).
Efficiency market theory: It is known as an important investment theory which state that
it is impossible to beat the market because market efficiency would cause in existing share prices
to incorporate and reflect every information in reliable manner. It is a kind of modern theory of
finance as a good starting theory which is efficient in capital market.
In 1970, Eugene Fama has published in their article that beside the meaning of efficient
markets, also the distinction among the three forms of efficiency weak, semi-strong and strong
aspects. The efficient market hypothesis and attitude of finance theory is having been the main
aspects of modern asset pricing for the next coming years. Apart from this, certain theories are
explaining assets pricing in effective manner. It happens to be major research areas in specialized
literature.
FTSE all share and trend:
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(b): Critically assessment of “efficiency” of the London Stock Exchange (LSE) market
The main important aspect of this particular theory of efficiency market which provide
crucial information about last couple of year performance of LSE market position. This
hypothesis is said to be fundamental aspect for the financial model and has significant impact
while making decision from investors as well as by other financial managers. As per the efficient
market hypothesis of the inventory market, the securities prices reflect every information which
is indifferent and cost-efficient. This data is more commonly present for all investors so that
everybody that can have an absolute and incurred comparative benefits for some assets in respect
to increase maximum growth for the company (Claessens and Forbes, 2013).
Henceforth, under this hypothesis of market effectively, even if there are more profitable
opportunities that an investor will realize more quickly and hence, the market will remain
balance for longer period of time. It has been determining that there are various types of EMH
assumption which exist in perfect capital market. Thus, the capital market is more intense
competitive, asset prices are more hard to be under or overvalued in more reliable manner.
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Because of which, investors would not be able to make abnormal gains by their overall
transaction. On the basis of undertaken capital investment risk, they would be able to earn
reasonable market return. In respect to keep the perfect market analysis, all associated
assumptions would be made into account.
 Initially, there are no taxes to be paid.
 Secondly, all investors and stakeholders have the same available data.
 Lastly, there are no any kind of agency cost to be connected with the stock ownership as
well as no any transactions costs are arises for an individual those are associated with
buying and selling of securities or any other shares.
LSE (London stock exchange) is a stock exchange which is situated in UK. It is one of
the fourth largest stock exchange in the international level after the Tokyo Stock exchange. It has
been seen that total market capitalization of GBP 3,396 billion in past 2012 year. It is considering
that the LSE is one of the most appropriate stock exchanges out of 3000 companies from more
than 70 nations. It had been admitted to trade on their market at more economical manner. The
one of the most successful and dynamic industry as compare to other stock markets. It has over
more than 500 firms, most of them are banks and stockbroker’s members. The major aspect of
this stock market is that from so many years they have the history started in past 300 years ago in
coffee houses in 17th century in UK. It was more vastly formulated in a strong and well regulated
stock exchange places (Gigineishvili, 2012). Marks and Spencer is one of the leading retail
company which is operating in more effective manner. It is selected because the market position
of this company is more effective as compare to other companies.
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There are certain evidences against the efficient market hypothesis:
It has been found that empirical evidences that support the weak-form and semi-strong
forms of EMH, they are having no uniformity of acceptance. Plenty of investment professional
will still meet the EMH with an appropriate deal to their specific client.
Over-reaction and under-reaction: It is known as efficient market hypothesis that
implies as investors would react quickly and remain unbiased in reliable ways to new
information. They need to determine that stock with low long term past returns tends to have
more future returns and vice versa. It is said to be huge challenges to the efficient market
hypothesis which an individual often over and under react to new ones (Weinstein, 2011).
Value versus growth: It is said to be essential investment professionals and academics
that guide as to create maximum value to the company on a regular basis. Typically, it is a value
of strategies that consists of buying stocks that have low prices which is related with accounting
books of accounting such as dividends and historical prices.
Small firm’s effects: According to this particular effects, it has been found that average
return on small inventory were too large to be deal with the capital assets pricing model. While
average returns on wide stocks were too minimum. Research indicators that are most of the
difference in comparison to small and large inventory in the ever month.
There are various types of activities that are categories and are represented underneath:
Primary market: The LSE allows UK and global companies to join the equity market in
accordance to gain access to capital and because of this the outcomes results in increasing money,
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increasing their share capital and obtain a market valuation through making initial public offering
process. Further, it gives great opportunities in various size companies to quote since it operates
different market. Companies from around to be world can list to a number of products which
includes shares, depository receipts and other debt obligations (Ahmed, 2013).
Secondary market: It is known as one of the most effective market for doing trade on
main market and alternative market. The largest and well regulated companies from around the
world are listed in the first marketplace. Over 1300 companies from almost 60 different nations
in order to enjoy the privileges in LSE. The FTSE 100 index is said to be primary share index of
the most highly capitalized UK companies those are listed on the main market. The second
referred market is for smaller growing nations. A lot of various industries are trying to join this
market which is asking to grow their capital. Moreover, there are various markets that are
associated with trade market (Tumminello and et. al., 2012).
Trading: In respect to maximize the liquidity of inventory the LSE offer trading stock
those are essential for the company in order to increase profitability position of the company. It
consists of transfer of products from one individual or organization to another, often in exchange
for wealth. It is an activities style of participating in financial sectors that seeks to increasing
overall traditional investing done by the company.
Information services: It is an effective form of financial market which used to provide
information for a structure within an organization that is responsible for their data processing and
recording of crucial data into their respective format. Every second of trading day the London
Exchange use to provide information ranging the data from individual trades and stock prices
shifts to companies’ overall announcement.
Derivatives: It was created to bring the cash equity and derivatives places that are closer
together. As valuable outcomes which expand the trading of derivatives while it reduces the total
risk and cost of the company.
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Graph 1: Inflation rate:
The under mentioned charts is indicating total rate of inflation which is increase as per
base rate %. There is inverse relationship among inflations and interest rates. After 2008, it gets
reduces drastically and remain constant till now.
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Graph 2: Bank rate and policy rates
There is direct relationship among the repo rate and lending rates which are being charged
by Banks to various borrowers in UK. Reduction of interest rate used to determine an economical
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monetary policy. It means that people would be able to borrow at minimum rate from central
banks to relend to their borrowers at reduced rates than earlier.
Graphs 3: Bond rate in EU
From the above bond rate, it has been seen that the organise line is representing the rate in
UK market. It means that it is more low as compare to other country rates.
Graphs 4: Bond price
According to this particular charts, it has been seen that bond prices of Bank of England is
representing downward slope. It means that they are decrease in every year.
Graphs 5: Quantitative easing of UK central banks
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