The stock market is perfectly competitive because there are a very large number of groups in the market. The stock market, as we know it, is a global community that consists of four different groups: public corporations; market makers; buyers; and sellers. Public corporations are businesses that offer shares, or ownership, to anyone willing to pay money for them. Buyers are investors who want to purchase ownership; sellers are shareholders who want to get rid of their stock in exchange for cash.
Market makers are companies or individuals who basically match orders from buyers and sellers to ensure liquidity in the market. The stock market is perfectively competitive because it has homogeneity of goods. Buyers can purchase the good from any seller and receive the same good. Price taking occurs only in perfectly competitive markets. Therefore, identical goods sold at higher prices, by one firm will be above the equilibrium demand for goods, which means that the firm which raises price won’t be able to sell any of their goods.
In the stock market nobody has the ability to change the market equilibrium price based on their own behavior. This means that there must be many buyers and many sellers. Everybody is a price-taker, which means that they must accept the market price. The stock market has perfect information. Everybody knows what their own choices are, and they know everything about the product. The buyer is capable of knowing what amount of marginal utility they will receive from consuming a product, and they will also know the amount of marginal utility they will obtain from consuming every possible other consumption choice. The stock market offers free entry in and out of the market. This means that people are not forced to buy or sell things they do not want. It also means that people are not negatively affected by other people’s market decisions References