Question

Analyse the Case
The stock market refers to markets that exist for issuing, buying, and selling stocks (equity shares) that trade on a stock exchange. An efficiently functioning stock market is considered critical to economic development, as it gives companies the ability to quickly access capital from the public. The stock market serves two very important purposes. The first is to provide capital to companies that they can use to fund and expand their businesses. The second purpose the stock market serves is to give investors the opportunity to buy and sell their stock for a profit if the stock price increases or decreases in the market. It provides real time trading information on the listed securities, facilitating price discovery.
Participants in the stock market range from small individual investors to large traders, who can be based anywhere in the world. Their orders usually end up with a stock broker at a stock exchange, who executes the order. Some exchanges are physical locations where transactions are carried out on a trading floor. The other type of exchange is of a virtual kind, composed of a network of computers and trades are made electronically via traders.
By design a stock exchange resembles perfect competition. Large number of rational profit maximisers actively competing with each other, trying to predict future market value of individual securities comprises the main feature of any stock market. Important current information is almost freely available to all participants. Price of individual security is determined by market forces and reflects the effect of events that have already occurred and are expected to occur. In the short run it is not easy for a market player to either exit or enter; one cannot exit or enter for few days in those stocks which are under book closure. (when shares are not allowed to be traded for a few days). Similarly one cannot enter or exit in those stocks which are in upper or lower circuit for few regular trading sessions. (circuits restricts the trading in those shares whose price has increased or decreased more than a certain percentage during the day) Therefore a player has to depend wholly on market price for its profit maximizing output (in this case stock of securities). In the long run players may exit the market if they are not able to earn profit, but at the same time new investors are attracted by rise in market price.

Analyze the case and answer the following questions.
(a). Identify the characteristics that resemble perfect competition in the stock market. (7.5 Marks)
(b). Which features of perfect competition are absent in stock markets? Is the stock market a good example of perfect competition? Explain. (7.5 Marks)

Answer 1