21 November 2016

Levels of Market Efficiency / EMH

Levels of Market Efficiency / EMH

Economists have defined different levels of efficiency according to the type of information, which is reflected in prices. To understand what is efficient market . First, I recommend you to read  EFFICIENT MARKET HYPOTHESIS AND ITS TYPES . There are three levels of market efficiencies, they are discussed below:

Weak-form efficiency

In this form of market the share prices fully reflect all information contained in past price movements. It is pointless to predict share price based on historical share price.

Recommended: How to download historical share price

Semi-strong form efficiency

In this form, All the publicly available information are reflected in Share prices already. This includes not only past price changes but also the earnings and dividend announcements, rights issues, technological advancements, appointments of directors, and more.

This implies that there is no use in analyzing publicly available information after it has been released, because the market has already absorbed and reflected it into the price.

To estimate the intrinsic value of a share the fundamental analyst gather as much relevant information as possible. This may include: macroeconomic growth projections, industry conditions, company accounts and announcements, details of company’s personnel, tax rates, technological and social change and so on.

Strong-form of efficiency

All relevant information, including that which is privately held, is reflected in the share price. Insider trading comes in to play in this form of market.which means few privileged individuals (directors) trade in shares, as they know more than the normal investor in the market. In a strong-form efficient market even insiders are unable to make abnormal profits.

Example: It is well known that it is possible to trade shares on the basis of information not in the public domain and thereby make abnormal profits. In this respect stock markets are not strong form efficient. Trading on inside knowledge is thought to be a “bad thing”. It makes those outside of that charmed circle feel cheated.

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