How to Be a Successful Investor Essay Example | Topics and Well Written Essays - 2000 words

How to Be a Successful Investor - Essay Example Market efficiency Eugene Fama in 1970 developed the concept of market efficiency on the basis of EMH (efficient market hypothesis). He suggested that at any given time the prices of stocks are purely dependent on the information present in the stock market regarding stock or overall market (Moyer, McGuigan & Kretlow 2008). He also concluded that no one can efficiently predict the exact future return on any stock because no one has access to the information which is not easily be predicted or available to everyone else (Damodaran 2002). Fama divided efficiency of a market into three levels: Strong-form efficiency Shows that stock price truly reflects all the information available, whether it is public or private. Investors did not get any additional value because it is quite impossible to predict the prices. Even the availability of insider information does not benefit the investor in any way (Moyer, McGuigan & Kretlow 2008). Semi-strong efficiency Movement of asset prices truly refle cts the availability of public information; therefore investor having insider information gets the investing advantage. The investor does not get any stock advantage through any fundamental or technical analysis. Weak form efficiency   Type of efficiency which states that today’s Prices of assets and securities shows the reflection of past prices. Therefore, technical analysis is useless to predict the prices in order to beat the market (Chandra 2008). Efficient market hypothesis (EMH) is also called as Random Walk Theory (Hebner 2006). This theory suggests that the movement or fluctuation of the stock price is a true proposition of all the related information regarding the value of the company that is available in the market. According to this theory, nobody earns profit more than the overall return of the market. In other words, it can be said that depending on the available information everyone earns the same level of return on the investment of stock. There are some cri tics of this theory that are related to fundamental and electrifying issues of finance. For example, why the price of stock change frequently and what are the factors that cause this change. All the stock related information has very important value for both investors as well as financial managers (Cai 2009). The concept of â€Å"Efficient market â€Å"was first developed by Eugene Fama in 1965 and he said that â€Å"in an efficient market, on the average, competition will cause the full effects of new information on intrinsic values to be reflected "instantaneously" in actual prices.† (Arffa 2001) The primary target of all the investors and finance managers is to invest in the stock that outperforms the market and provide more return as compared to other stocks. Similarly, most of the investor selects the securities that are undervalued having expectations that their price will beat the market, and in the end, they get their desired return. All these decisions are based on different valuation techniques of stocks, future expectation and predictions depending on the available information. Effective use of the valuation techniques and prediction enables the investor to get more return on the investment made.