Question

In a perfect market, the supply of funds will equal demand for funds. However, there are restrictions that may cause limitation, which may make the capital market imperfect. What kind of restrictions can you think of? Thank you.

Answer 1

There are various kinds of restrictions which are making the capital market imperfect and these restrictions are as follows-

A. Government are often accused of direct and indirect intervention into the capital market that does not make the capital market perfect because that will be limiting the independence of of various companies.

B. There are manipulations of books of accounts and window dressing of book of accounts which are not leading of true representation of the financial statements of the company and that are making the capital market imperfect.

C. There is a nexus formation between various brokers and other financial intermediaries who are trying to manipulate the prices by indulging into manipulative practices and that is leading to the inefficiency of the capital market and capital market not being perfect

D. There are a lot of manipulative practices and cheating and flooding which are involved in the capital market which are leading to losing of the efficiency of the capital market and imperfection of the capital market

E. Capital market can also be accused of various kinds of insider trading by the insiders and management of the company and they are trying to inflate the prices or affect the prices so they will be leading to inefficiency in the capital market as well

F. Various financial intermediaries are often accused of cartel formation and cheating the retailers in the capital market by issuance of various kinds of messages which are not trustworthy so they should be stopped and a fair and efficient system should be adopted in order to have a capital market which will be perfect in nature.

these are the limitations that are limiting the scope of capital market and these are leading to capital market becoming inefficient and imperfect.