Market Efficiency

This topic has 4 replies, 2 voices, and was last updated 1 year ago by John Moffat.

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February 28, 2021 at 4:38 pm #612155
HamzaYusuf
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Hello Sir JOHN.

I noticed a line from the March 2016 examiner report where the examiner has mentioned a line that says: “A number of candidates struggled to correctly identify the impact on share prices under forms of market efficiency. In particular, it is commonly thought that in a weak-form efficient market that share prices are slow to react to new information, however, this is not the case.”

When I studied weak form, I read that share prices are based on past information (past trend), and share price follows random walk where new information shouldn’t immediately affect share prices but the examiner says otherwise.

Could you please explain what did the examiner mean?
February 28, 2021 at 4:50 pm #612158
HamzaYusuf
- Topics: 38
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I am sorry but the line may be from June 2016 examiner report 🙂
March 1, 2021 at 8:01 am #612235
John Moffat
Keymaster
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Weak form efficiency assumes that the share price will react to announcements made by the company but that if will react instantly to new announcements (not that it takes time for the share price to react).
March 1, 2021 at 10:30 am #612301
HamzaYusuf
- Topics: 38
- Replies: 19
In the specimen, there is a question

[Question] Gurdip plots the historic movements of share prices and uses this analysis to make her investment decisions.

[Solution] states that since “Gurdip is basing her decision on technical analysis which means that she believes that stock market is not efficient at all.” I am not able to understand the logic here!!!

Can you please explain fundamental analysis & technical analysis and why they are linked to market efficiency?
March 1, 2021 at 2:54 pm #612355
John Moffat
Keymaster
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Technical analysis is basing the share price purely by looking at previous movements and looking for a pattern.

Fundamental analysis is basing the share price on what the company really seems to be worth taking into account future prospects.
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