A market is efficient with respect to a particular set of information Essay

A market is efficient with respect to a particular set of information if it is impossible to make abnormal profits - Essay Example Second part of the essay contains on a market conclusion about the practical behaviors of stock markets in relation with stock movements. This debate also include the information of the market behavior that in which circumstances an investor can make abnormal profits and in which conditions it is not possible to make abnormal gains and profits. It this part, debate is also made on the question that either market is efficient or not. The last part of this assignment is based on a general conclusion about this study. Topic: A market is efficient with respect to a particular set of information if it is impossible to make abnormal profits by using this set of information to formulate buying and selling decisions. The efficiency of the stock market is based on the efficient market hypothesis. Many investors believe that they can select stock with the help of their forecasting and valuation techniques and can make abnormal profits easily. On the other side the efficiency market hypothesis states that all the stock prices are based on all the accurate information and reflect the full and fair information. This directly means that it is not possible to consistently outperform the market by using any information that the market already knows, except by luck. The idea is that now information is quickly and efficiently incorporated into share prices at any point of time, so that old information cannot be used to judge the future movements. The term "efficient market" was first introduced by in 1965 in a paper by E.F. Fama who suggest that â€Å"in an efficient market, on the average, competition will cause the full effects of new information on intrinsic values to be reflected "instantaneously" in actual prices† For proper understanding of the efficient market hypothesis we must have to aware about the basic market categories. A short summary of these categories are described below Market inefficiency An inefficient form of efficient market is one in which the valu e of the securities is not always an accurate reflection of the available information. In an inefficient market, some stocks will be over priced and other will be underpriced, which means some investor can make excess while other can lose more than warranted by their level of exposure. The logic behind this process is that proper valuation of securities and stocks are depend upon the latest information and in an inefficient market no latest data about the stock and securities are available. So this can directly result into wrong decision about buying or selling any stock. (BORENSTEIN, S., BUSSE, M. R., & KELLOGG, R. (2007). Principal-agent incentives, excess caution, and market inefficiency evidence from utility regulation) Weak form efficiency In a weak form efficient market share prices reflects information about all the past prices movements. This situation directly relates that these past movements do not help in identifying positive trading strategies. (Returns and weak form ef ficiency: betting markets 1984) In these kinds of markets future prices movements cannot be predicted because all the information is available of the past price movements. And any technical analysis cannot help to make a consistent gain on the market. It is stated in a paper by Kendall in 1953 that the prices of shares followed a random walk. I.e. there