Question

Is The Stock Market Efficient? Provide reasoning and an example to support your answer for why or why not.

Answer 1

Efficient stock markets mean that the investors cannot earn excess returns as all the publicly available information is reflected in the stock price. All the information about volume is reflected on stock and past prices cannot be an indicator of future prices.

In the real world, although stock markets are not efficient as active mangers consistently beat the market and earn above normal returns by carefully picking out stocks with proper market timing. With proper research and reasonable pricing, the investors do make a gain in the markets.

For example, a person can use his knowledge to pick stocks which are currently undervalued and ca profit form these as the prices of these stocks rise.It is not uncommon in stock market to witness stock prices going up which is against the entire fundamentals of an efficient market hypothesis. Stock prices do not always follow a random walk, some analysts beat the market using technical analysis where the past prices have been used an an indicator to predict the future prices. Sometimes stocks tend to over react (either rise or drop sharply) to a new information released, with thorough research and purchasing at the right price investors can profit in the market.

Example: I profited on Tata Motors stock after the news of it's above average sales in the month of February was released which led to a boost in the stock prices. As i had purchased it at a reasonable/discounted prices, the release of this information made me realise a profit on my trade.