Week 3 (Trial 2): Stock Market Efficiency

In this week lecture,  I have learned about the stock market and how to evaluate the stock market efficiency or in other words, to what extent the stock market is regard as efficient for some cases. Stock market is very important to government and industry in order to raise their long-term capital to finance the investment or joint-ventures abroad, investors also can have their excitement of returns in their investment, and not forget where society might get the advantage from this which grant a more appropriate allocation of sources so that they can get a maximum mix of goods and services. The stock market or stock exchange needs to be well-run for the good of all sorts of participants such as buyers, sellers and investors. For instances, help firms to find funds and grow its business, and allocation of capital will be more appropriate if there is a well-run stock market.

 

However, there also might have the opposite of a well-run stock exchange therefore, this can be avoid with the 3 different levels which had defined by the economist: weak-form efficiency where the share price is reflect regarding the information based on the past movement and the history of share price is meaningless as it can not predict the future, semi-strong efficiency which share prices are fully reflect with all relevant publicly available information and strong-form efficiency indicates that share price reflect with all relevant information including private information where the insider dealing are know more about their share price movement other than others do.

 

Lets look at this case where Facebook's share price was fall down by more than 9% due to the fourth quarter of its profit was down by 79% as reported in Money Morning Newspaper on 31st January 2013. Could we identify or examine if this change of share price react rationally and quickly and what about the evaluation of its efficiency? Is it in the weak-form or semi-strong form or strong form efficiency? Well, Facebook's revenue was $1.59 billion, up 40% year over year and $1.53 billion in future. The Menlo Park, CA-based company's advertising business grew at its quickest pace since before the company's initial public offering (IPO) on May 18, 2012, and contributed to the robust revenue growth but then its shares ended the volatile after-hours session down some 4% at $29.98. The sell off continued Thursday with its shares down by 3.52% in early morning trading.

 

From that news, it is shows that the share price will change which is, it is unforcastable and react quickly and rationally if any new information about a firm is revealed in the stock market and this also indicates that the share price of Facebook is in  semi-form efficiency because the share price is reflect not only based on the past information but also the current information as the investor also can predict for the future whether FB can make money in the future or not.