Question

the corona pandemic is an unprecedented event that has affected our lives in an extraordinary way. we can see it effects on our economy as well. due to the pandemic majority of the stock prices are plummeting. savers who are holding these stocks are observing major declines in the value of their portfolios. can savers have better outcomes in their stock market portfolios by changing the stocks they own? What would efficient market hypothesis says about this? Start with explaining clearly what efficient market hypothesis is.

Answer 1

The efficient market hypothesis was actually developed by an economist Eugene Fama in the 1960s.It is market theory which says about an efficient market of stocks where there are large numbers of investors, especially rational who desire for maximum profits and they are actively competing each other with market analysis, to predict the future market values of stocks or securities and most importantly in such market current information are readily available and share prices reflects with relevant information based on events that have already occurred as well as on events expects to take place in future. This theory says that it is impossible to beat the market average returns or achieve above average returns on a justiciable criteria. This theory is based on a passive investing strategy which says that all the known facts and current information about investment stocks in the market is considered into the prices of those securities and therefore there is no scope for analysis about the market and it will not give an investor any advantage over other investors. This theory also propagate that stocks always trade at their fair market value and at any point in time the actual price of a stock will be a good estimate of its basic value.

There are three degrees, of the efficient market hypothesis

They are simply classified as : Weak Form, Semi-strong Form, and Strong Form

The weak form says that current prices of securities or stocks are reflect with all available public market information, and says that past information like price, volume and returns of stocks has no relationship with the future price or returns. This form of the hypothesis not supporting technical analysis of markets to achieve above average returns in future.

The semi-strong form says that it does not support the usefulness of both technical and fundamental analysis and says that stock prices are adjusted quickly based on all available public information.

Finally, the strong form says that current stock prices are factored by all information which includes publically available information like historic,current, inside information as well as private information.

As we know the reasons for stock market crashes vary every time, and now the corona pandemic is an unprecedented event that has affected majority of the stock prices are falling. Experts in stock market says that there is one rule which prevails in the stock market is that when investing: Never lose money.

What an investor should do that he should be always remains vigilantly aware of their movements and the losses they willing to bear. All the individual investors want that their stocks to be fruitful and multiply. Therefore the key to successful long-term investing is preserving capital. Some of the key strategies to protect the portfolio are noted below.

1. Investors should invest in well-Diversified portfolio which outperform in the market.
2. Investing in non-correlative asset classes such as bonds, commodities, currencies, and real estate to the equities in portfolio.
3. Use Stop Losses procedures to protect against the loss due to fall in share prices.
4. Invest in stocks or securities which pays dividends
5. Invest in principal protected notes which is similar to bonds and that are fixed-income securities and return your principal investment.

In some extent the efficient market hypothesis support about all these strategies because its basic says that stock prices are factored by all information which includes publically available information as well as private information and depends on events which is expected to take place in the market.