Market efficiency
Firms list in the stock market to raise more revenue to improve their services or product provided or expand to new profitable ventures which cannot be funded by the income in their current operation. Downey (2020) defines an efficient market hypothesis as a hypothesis that defines that share prices reflect all the information of a company. The efficient market hypothesis makes it impossible for investors to trade on undervalued or overvalued stocks in the market. The EMF makes the share prices become an accurate or true representation of the value of a share or the firm.
There are various forms of efficient market hypothesis, and as defined by CFI (2020) they include:
- The weak form- this states that the share price may reflect all the firms’ available public information but may not reflect any information which has not yet been made public. The weak form indicates that the previous price or current share price cannot predict future prices.
- Semi- strong form- this form downplays the importance of both technical and fundamental analysis. It incorporates the concepts of weak form and adds that the share price adjusts to any new information which has been made public.
- Strong form- this form holds that the share price reflects both private and public information. The public information includes new, historical, and existing information, and the private includes insider information.
The efficient market hypothesis is very much effective and reflects the current trends in the market. For example, in a case, a company is releasing its current financial information, the stock prices will move to reflect the status of the released financial information or status of the firm.
References
Downey, L. (2020). Efficient market hypothesis (EMH). Retrieved from www.investopedia.com/terms/e/efficientmarkethypothesis.asp
CFI (2020). What is the efficient market hypothesis? Retrieved from corporatefinanceinstitute.com/resources/knowledge/trading-investing/efficient-markets-hypothesis/