Question

Discuss Efficient Capital markets

Answer 1

Efficient capital markets are the markets where perfect information are present about every company to everyone in the market and there is no material non public information which can be used to earn profits by those who have access to such information.

The efficient market is a hypothesis. It is not possible to have an efficient market in the real world. The efficient market is further classified into three forms.

1. Weak form efficient markets - This form of market hypothesis believe that it is not possible to determine the price of a stock using historical data and the price follows a random walk pattern

This form says that technical analysis is of no use in determining the price and thus in the short term, the price movement is completely random. However, this form of market hypothesis emphasises that fundamental analysis may help in determining undervalued and overvalued securities.

2. Semi strong form efficient markets - It states that the price is based on material public information and price changes due to changes in that information. This is the most practical among all efficient market hypothesis. It says neither fundamental nor technical analysis can be used for higher profits. Only material non-public information can help in having superior gains.

3. Strong form efficient markets - It states that the price of stocks in the market is determined using all information - public or non-public. It also says that no research can provide returns exceeding normal returns