Define and explain the Efficient Market Hypothesis (EMH) and discuss in detail the implications it has for the determination and prediction of share price

Excerpt of the paper

Introduction

Understanding the market and being able to make informed decisions when investing is the dream of every investor. Usually, there are several uncertainties within the economy. And it is such uncertainties that make the investors want to dig into the market and understand it fully before investing (Jurado, Ludvigson, and Ng, 2015 p.1189). This is because, no investor projects a loss, even though it is a possibility. What then happens when investors get hold of information about the market? Is it possible to for an investor to get hold of information regarding the price and nature of the market before others? Will the competition be fair? According to the Efficient Market Hypothesis (EMH), no investor should have a competitive advantage over the other. Thus, no investor should privately hold information about the market secretly, or slightly before the others. What then is an Efficient Market Hypothesis?  The essay defines the Efficient Market Hypothesis, discussing its implication for the determination of the share price.

Efficient Market Hypothesis

Efficient Market Hypothesis is an investment theory whereby the share price reflects all the available information about a particular market or stock Lo 2017, p.2). With EMH, stocks are generally traded at their fair values in the stock exchange market. Thus, it is impossible for any investor to purchase the undervalued stock or sell at inflated prices. The investors, therefore, cannot outperform the market unless they only conduct riskier investments. As per the EMH, no investor should have any information about the market before the other investors. This usually has implications in determining share prices.

END OF EXCERPT PURCHASE TO VIEW THE WHOLE DOCUMENT