Confidence And Market Volatility

Stock Movement Affects Stock Market And Its Role In Role In Making The Market Efficient

The prices of an individual stock are usually dynamic making the whole market dynamic and even have volatile character. Raising of the stock market create confidence in the direction of the economy. (Hameed et al., 2010). As the prices rise continuously, more investors are attracted to the market which creates momentum. On the other hand, the falling stock market scares away investors. At this condition, people feel pessimistic on the economy. Media reports on the trends in the market can be a source of panic and people start moving their investments away from the stock market into low-risk assets which can create more impact on the stock market.

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Raising the stock market creates an effect of wealth and investors are more confident as their portfolio of investment rise in value. In this case, people then spend more on large things like cars etc. In contrast stock fallings creates panic and people spend on non-essential items such as domestic products.

Market efficiency refers to the level at which prices in the market reflect the available and relevant information. Based on the efficient market hypothesis that was invented in 1970 by Eugene Fama, there is suggestions that at any specific period, price completely reflects all the information available on a specific market (Guerrien &Gun, 2011). Stock in the market is therefore priced based on the inherent investment properties and available information which is equally distributed among all market participants.

Market efficiency can be graded into three categories which include strong efficiency, which suggests that all information available in the market both private and the public is taken into account in the pricing of stock and therefore even insider information could not help give investor information. On semi-strong efficiency, the efficient market hypothesis state that all information that is public is calculated into the price share of the current shock and this means no technical or fundamental analysis can give an investor superiority. Lastly, on weak efficiency, the EMH claim that all stock's past information is reflected in that day's stock price. This means only technical analysis cannot be utilized in beating the market.

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Example of an implications of market that is efficient market is that once new information is availed, the current prices also change. This means that once information is available in the stock market, there is a subsequent increase in prices which is an indication of stock being able to respond immediately to new information (Hamid et al., 2017). For instance, supposing apple were to announce that they have come up with a technology that enables the company to manufacture chips that would make a computer to be twenty times more faster at three quarter the cost, but to implement and manufacture the chip would take a year, stock market would be forced to increase immediately once the information is available when the chip will be manufactured-a year later. This is an indication of falling and raising of price due to stock movement affect the market by either encouraging investor or turning them away.

Reference

  • Guerrien, B. and Gun, O., 2011. Efficient Market Hypothesis: What are we talking about?. real-world economics review, 56(11), pp.19-30.
  • Hameed, A., Kang, W. and Viswanathan, S., 2010. Stock market declines and liquidity. The Journal of Finance, 65(1), pp.257-293.
  • Hamid, K., Suleman, M.T., Ali Shah, S.Z., Akash, I. and Shahid, R., 2017. Testing the weak form of efficient market hypothesis: Empirical evidence from Asia-Pacific markets.

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