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In Chapter 7 the concept of efficient markets is discussed. An efficient market is one in...

In Chapter 7 the concept of efficient markets is discussed. An efficient market is one in which there are many buyers and sellers analyzing securities, and security prices react quickly to new information. How efficient do you think our stock market is? If it is not perfectly efficient, what prevents it from being so? What are ways to make it more efficient?

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Efficient market hypothesis- This theory says that share price reflect all the important information. It is impossible to beat the market and investors only can generate higher returns by purchasing riskier securities. Stocks always trade at their fair value. Investors can buy undervalued stocks and sell at higher price to book the profit.

Stock markets are not efficient- Actually it does not happen in the real world. All the stocks do not trade at their fair value. One news is enough to bring the shares or overall market down. Market works on sentiments. When there is big news in the economy, market goes in either direction, if there is positive news, market goes up and if there is any negative news, market free falls.

Even Warren Buffet think that market is not efficient. We can also take the example of stock market turmoils that happened in 2007-08, 1987, 1929.

Stock markets can be made efficient by proper research. Investors should do fundamental and technical research and then should invest into value stocks, they should not panic and should wait. Long term investment in stock market is always fruitful.

jeff jeffy answered 1 month ago
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