Why is it important that market prices reflect all relevant information about securities
? With accurate price information investors can determine which investments are the most valuable that is providing the highest expected return for a given level of risk and invest accordingly. How does an investor determine the best forex trading opportunities?
Informational efficiency ensures that the financial markets are allocationally efficient because households or business firms can get the information they need to make intelligent investment decisions. A market is operationally efficient if the costs of conducting transactions are as low as possible. These transactions costs include broker commissions, bid ask spreads and underwriter spreads. Why is operational efficiency important allocational efficiency? If transaction costs are high, fewer financial transactions will take place and a greater number of otherwise valuable investment projects will be passed up. For this reason investors will not take advantage of the forex trading tips they may receive. In this respect, high transaction costs can prevent firms from investing in all desirable projects. The foregone investment opportunities mean that fewer people are employed and economic growth slows or declines. Society becomes worse off.
This whole concept of efficiency and missed investment opportunities flies in the face of our recent economic collapse due to the abuse of derivatives. Derivatives were sold as the new economy and paragon for operational efficiency. What what works in theory fails in practice. That is certainly a fair statement and our current economic conditions seem to justify that but any society or rule of law will collapse under the oppressive selective enforcement of rules and regulations that penalize the honest investor and reward the scoundrels of Wall Street. At this point there is little point in discussing any form of efficiency until the black cancer is excised from the dying body of a once thriving financial market.