Question

Please answer with a minimum of 250 words. Thank you

We have learnt that securities markets are efficient most of the times, that is, security prices reflect all available information and it is not possible to beat the market consistently. However, there are instances or time periods when markets don't seem to be efficient and investors are able to earn excess returns. These are known as anomalies. Read the following discussion about market anomalies and share your views on this.

http://www.investopedia.com/articles/stocks/08/market-anomaly-efficient-market.asp

Which of these do you find most interesting?

Why can't investors beat the market consistently, if they are aware of an anomaly?

Do some more research and find out if the anomalies reported in the article are still existent. Don't forget to share and cite your sources.

Answer 1

It is rightly said that investors cannot beat the market as all the information most of the times gets factored into the share prices by the time they get to know it.

We need to understand the information flow which follows the top down approach. Whenever there is some price sensitive information is generated, the first set of people who get to know about it is the insiders or the executives who work in that company. The second set of people are the large brokerage houses who have their highly placed sources who pass on this information. The third set of people are then retail investors but they already miss most of the opportunities to make money by that time.

There are several anomolies in stock market like time lapse effect. For example, if an event that happens over the weekend, so it gives enough time to investors to build their positions to catch the impact when the market opens.

Another one is, time of the month/year effect - This usually happens on last day of the month or first three days of the month when lot of money flows into the market due to payout of salaries.