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Financial
Markets
Primary and Secondary Markets 
Exchange markets at the stock exchange
in New York, London and Tokyo represent an example of the
secondary markets,
which are really active and competitive. They do not provide companies
with any profit and do not raise money for the corporation, they rather
provide a market for investors to
buy and sell existing stocks and bonds. Secondary markets are crucial to
the corporation, because they signal investor's beliefs about particular
industry or corporation and the future expectations
for its progress, which in term determines the value of the corporation.
Primary markets are markets that handle the initial issuance of securities,
that actually raise money for the issuing corporations.
Among
primary markets,
there are two distinguished categories: seasoned and unseasoned transactions.
A security is believed to be seasoned, if a corporation issues more of
an existing security, which means that the investors know more about the
securities from the previous trading in the secondary markets. Therefore,
it will be the secondary market that will determine the price and other
terms of trade for the new seasoned offering. Issuing new securities is
referred to the unseasoned transaction, which is the issuing of the new
securities for the first time on the markets. Initial Public offerings (IPO's) have no stock record, so their
analysis requires more time than the seasoned trading, as the lack
of the historic information results in the consistent under pricing of
the new stock. There are two theories attached to this phenomena: one argues
that because very little information is available about the stock, it
must be underpriced so that the poor informed investor will buy the
securities. Another theory, and to my mind, the more relevant one, states
that underwriters knowingly underwrite the price of the stock and locate the underpriced shares to the favored clients, thus 'legally' cheating
the system. Information inefficiency in Financial Markets Since investor
do compete with each other for the latest and most accurate information
that will give them an edge in assessing the value of financial securities,
this means that security prices quickly reflect the information used by
the investors.
Market Efficiencies 
There
are three types of existing market efficiencies
1) Weak
form efficiency assumes that security prices incorporate only historical
price and volume data. According to the weak form efficiency market, investors
won't be able to earn abnormal profits because as soon as one investor
recognizes a pricing pattern due to the supposed information efficiency,
everybody else will start investing, following the same pattern and therefore,
eliminate extreme potential profits. It is concluded that investors cannot make abnormal profits using strategies that are just based on the
historical price and volume of information.
2) Semi
strong form efficiency assumes that security prices fully reflect
all public available information, including historical price and
volume data. This form of efficiency implies that fundamental analysis
of publicly available information will not result in highly abnormal profits.
Major financial markets are found to be semi-strong efficient. Prices
in such markets vary greatly in response to a wide range of new information,
and it is the responsibility of a good and effective management team to
foresee problems and price adjustments and prepare for them.
3)
Strong-form
efficiency assumes that security prices fully incorporate all
public information plus all non-public information, such as information
available to the managers in the corporation. This has significant doubts,
because there is no doubt that insider-trading does take place in the
markets. The problem of asymmetric information in the stock market investing
may decrease investor confidence in the market operations and create serious
misbalances in the market investing. Implementation of the laws against
insider trading increase investor confidence in the market and their willingness
to invest.
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