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Hello sir,
I understand the efficient market hypothesis and its types but I am unable to understand about market paradox what does it mean and what it is referring to paradox. can you please help me with this.Market paradox is not really in the syllabus.
However what it is, is that an efficient market is when share prices accurately reflect investors expectations and it happens when investors are buying and selling shares as expectations change which in turn results in ‘accurate’ share prices. (If they think prices are too low then they will buy shares to make a profit, if they think share prices are too high then they will sell shares – this process ends up making the share price ‘accurate’)
But the paradox is that if investors believe there is already an efficient market then they will believe the share prices are already ‘accurate’ and so there is no point in them buying shares thinking the price is too low and that it will increase etc.. If they then stop buying and selling in this way it would then result in the market being inefficient 🙂
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