The Efficient Market Hypothesis Essay Example | Topics and Well Written Essays - 3500 words

The Efficient Market Hypothesis - Essay Example This form of hypothesis shows that it is impossible for an individual to outperform a market by using any type of information that is known in the market except through good luck. The information or news that deals with the Efficient Market Hypothesis states that anything can affect the prices of the traded assets and the effects realized in the future trading period of a company. It has been noted that on average, competition makes the full effect of the new information that consists of intrinsic values to be reflected immediately on the actual prices of the traded assets. The investors in most cases check for the securities that have been undervalued and those whose value would increase in the future so as to make a concise decision on how to carry out their operations within a stipulated period of time. An efficient market is a market that is considered to have many people in the market who are informed about the existence of the stocks and are ready to maximize profits through carrying out the business activities. The market thus shows the prices of different goods and services in the market and relevant information concerning the activities as well as the events that may be taking place within a stipulated period of time. ... The technical analysis involves the process of searching for the recurrent and the predicable patterns that are in the stock prices so as to increase the returns of an organization. Where past prices do not contain any useful information for predicting the future prices, then, there is no use of using this form of technical trading rule within an organization. Fundamental analysis is another form of analysis that involves the use of earnings and the dividend prospects of a firm, the expectations of the future interest rates and the evaluation of the risk factors to determine the right prices of stocks. Efficient Market Hypothesis therefore predicts that the fundamental analysis may fail anytime of the year. The Efficient Market hypothesis theory states that it is impossible to outperform a market since the prices are already incorporated and can reflect on all the relevant information that is required. In case an investor engages himself or herself in the business of buying or selling securities, then this is termed as a game of chance and not of skill. There are some instances where the markets are efficient and they have current information. In this case then, we have the prices reflecting information that does not show how to buy the stocks at a bargain price. The stocks should therefore be traded at fair values on the stock exchange so that the investors may not purchase the stock at an under price or even sell them at inflated prices (Teweles, Jones, and Warwick, 1998: 113). In case this procedure is followed, then, the market cannot be outperformed through using the expert stock selection or the market timing process and in this case only the investor can be in a position to obtain