Based on recent events, discuss whether the stock markets are efficient according to the EMH - Essay Example

The investors will gain through selling their shares at a higher price than they bought them, thereby making a profit. In addition, they benefit from dividends realized by the company, though the value of dividend earned will depend on the number of shares that a person has. It’s not always that the investors benefit, they might experience losses when the share prices decrease. Shares are traded through share exchanges, which take the form of Over The Counter (OTC) or through listed exchanges.

2 Efficient Market Hypothesis Companies, for a long time have been taking advantage of Efficient Market Hypothesis, which was developed in the early 1960’s by Professor Eugene Fama. This is a theory that shows how impossible it is for a person or a company to beat the market. It shows that when making selling or purchasing decisions, the value of available information is indispensable.3 It states the importance in three forms, the weak form, semi-strong form and the strong form. In the weak form, it’s said that the history of a company can be shown by the past prices.

Some academicians however dispute this and say that the past outcomes of a company can never dictate the future. In the semi-strong form, the theory states that the prices not only show all past available information but can also predict and depict what the future will be like. In the strong form, it shows that prices can depict all information about a company, including the most private information, and will definitely affect the future. Investors can thus make their investment decisions depending on the information available.

4 However, this theory does not stand to state that the information available is 100% certain about the future. It goes on to show that companies cannot overprice their shares or buy undervalued shares in an attempt to beat the market. New and available information is accessed by all and, people will therefore take any available chance and opportunity.4 However, recent happenings and events in the stock markets shows how efficient or not, the markets use the Efficient Market Hypothesis. There are cases of world’s most known investors withdrawing and selling their shares at an alarming rate.

The case of Warren Buffet is a good example. He has been known to invest millions into shares in American companies, even where others were afraid of investing, and has reaped huge benefits from the investment.5 Recently, however, Buffet sold over 19 million shares he had in Johnson and Johnson, and more in Krafter foods. Others like John Paulson have also followed suit. Canada’s greatest technology firm, Research In Motion has not been spared either5. From 2009, its value has been dwindling at a rate that is hard to avoid.

In the USA, it has experienced a 12% drop, all the way from 44% in 2007. In the Toronto Stock Exchange, it has experienced a 75% drop. 6 Its investors in the stock market are no longer interested in purchasing any more shares. To them, it is not a risk worth taking. The Dow Jones Industrial Average has seen many of these changes. Companies are experiencing changes that they had not anticipated, which results to investors pulling out and selling their shares. These stock markets have not been able to steer away or take advantage of economic anomalies.

7 The stock markets have been effective in utilizing the EMH. The investors had already had past information on what was to happen.