Question

Efficient market hypothesis (EMH) states that the price of a security (such as a share) accurately reflects the information available. When information arrives, how fast will an information about a share be captured and reflected in the share price depends on the degree of competition among market investors. List and briefly explain, in your own words, two variations of information.

Answer 1

Answer: Efficient market hypothesis (EMH)- This theory states that security prices reflect all the available information. It is not possible to beat the market, investors cannot earn higher returns because security prices act as per the newly and current available information. Information that is there in the market, already incorporated into the market prices of stocks.

Degree of market efficiency- There are three degrees of market efficiency-

Weak form- This degree says that historical information related to any share is not at all useful to predict the future price trends of that particular share. Any relevant information is already incorporated into the prices.

Semi strong form- This says that neither technical nor fundamental analysis works in practical scenario because stock prices already captured the public information quickly as soon as it arrives.

Strong form- It says that stock prices reflect both public and private information. It suggests that no investor will be able to generate higher profits.

As soon as any information is released in the stock market, stock prices instantly move either up or down, based on the information available. As per behavioral finance, Investors' sentiments work in the market, huge buying and panic selling can be seen in the market. Whenever there is any positive news related to a particular company, investors start buying that stock and the same goes up and if there is any negative news associated with a company, investors start selling and the stock free falls.