Every time traders put their money in the stock market, they always want to gain a huge return. Some of them, even aim to outperform or beat the market efficiency.
Yet, according to the Efficient Market Hypothesis (EMH), at any given time, the market efficiency prices reflect every available information about a specific stock and/or market. This theory also believes that all traders in the stock market cannot predict the future stock price. That is because there are no traders that can access the unavailable information.
Its Effect on the Non-Predictability
Naturally, information reflected on the stock price should not be limited to the financial news and research alone. There is also information about social events, and economics, as well as, the ways traders perceive that information.
EMH assumes that the price will only respond to the available information within the markets. Thus, inefficient market the stock prices are random. It is also not predictable, making the pattern become discern.
The random walk price, as discussed in the EMH’s school of thought, create the failure of a certain investment strategy. Especially, those that want to consistently beat the market. This theory, also suggests that putting the money in an index fund can be more profitable than involving in portfolio management.
How Can a Market Become Efficient?
In order for a market to be efficient, traders should assume that the market is inefficient and they have the ability to beat it. However, most of the investment strategies that aim to take benefits from the inefficient market become the fuel that supports the market efficient.
A market supposed to be liquid and large. That way, there will be wide availability of accessibility and cost information. Other than that, the cost of the transaction also has to be cheaper than the profit expected from the strategy used.
Based on the EMH, investors have to also own enough funds to capitalize on the inefficiency until it disappears again.
