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Financial Markets Efficiency - Essay Example

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Running Head: Efficiency of Financial Markets Efficiency of Financial Markets Efficiency of Financial Markets In particular, the three forms of market efficiency are “the weak form, the semi strong form, and the strong form” (Williams, 2005)…
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Financial Markets Efficiency

Download file to see previous pages... Therefore, this form suggests that if everyone is aware of the price records, it is of no value. However, many financial analysts acquire profits by evaluating pas prices using technical analysis including pointing price policy or moving average technique, which according to this form has no value (Horne, 1990). Semi-strong form of market efficiency says, “Current prices have influence of all the information that is publicly available” (Williams, 2005). All the information takes into account the annual reports of the company that is “balance sheet and income statements showing the status of assets and liabilities of the company and telling about the revenues, expenses, and income of the company” (Fleming, 2004). It also encounters the payment of dividends, announcement of merger plans, upcoming macroeconomics expectations pertinent to inflation and unemployment (Fleming, 2004). It needs not only to be financial but every aspect that is responsible for adding or subtracting value to the company. It can also be about the behavior of management with employees, the competence of research and development department, quality of the products and perception about the company in public’s mind. ...
One needs to make a deep research to gather all the information, which is helpful in determining the current prices and getting profitable returns. The strong form of market efficiency does not only have impacts of public information but it also opts for information inside the company that is private information. Strong form is different from semi-strong form in a way that it does not want anyone to acquire profits even when public is not aware of the trading information at that time (Bollen & Inder, 2002). In simple words, it means that even the management and other important organizers of the company that is insiders should not be able to acquire profits on company’s shares. As insiders have knowledge about profitable shares, so they should not acquire these shares after few minutes later they make the decision. Additionally, the members of R & D department should not get profits on information they discovered half an hour ago. The objective of strong form of market efficiency is that markets should possess abilities of anticipating in an impartial manner. However, this form of efficiency is very difficult to achieve as greed for money and other monetary rewards can persuade ones inner light and convert it into flesh. The question arises that why is there a need of efficient market. A market has to be efficient otherwise; investor’s money would go nowhere. An efficient market is one where all the information influences the prices of shares. Market has to be “large and all the information should be available to investors regarding a company’s financial conditions” (Bollen & Inder, 2002). In this kind of market, transaction costs should be less than the opportunity cost of investment. Opportunity cost is the ...Download file to see next pagesRead More
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