Get premium membership and access questions with answers, video lessons as well as revision papers.
Got a question or eager to learn? Discover limitless learning on WhatsApp now - Start Now!

Efficiencies in the stock exchange


Date Posted: 7/18/2012 3:34:19 AM

Posted By: moff J  Membership Level: Silver  Total Points: 485

What are your investment options? Real Estate?, share stocks?, or Treasury bonds?
Knowing your investment options is one thing and knowing the returns and risks in your portfolio is another.
Lets take the stock exchange, for example; many people do not know how it operates or the information that can assist them in making sound stock investment decisions. A lot of people run to buy shares of newly-listed companies, or already trading companies without understanding the fundamentals of the stock market. A company may be doing very well in its operations, but that does not mean that its shares will automatically do well also, in the stock market.
A lot of factors come to play in the stock exchange for the determination of the share prices of a given company. Among them is the efficiency of the stock market. It determines the extent to which insider trading is possible and who profits from a given stock.

Efficiency of the stock market refers to the extent to which publicly held information and privately held information is available to the general public to enable them make investment decisions.
There are three forms of efficiency in the stock market.

1. Strong Form Efficiency
This is whereby the privately held information is available to the general public. This ensures that insider trading is not possible since all the stakeholders are privy to the information concerning that company. Therefore, any expected gains or losses from the share price movements is anticipated by all the investors in that stock.
This kind of stock market efficiency provides a level playing ground for all the players in the stock market. They have the capability of making sound investment decisions and the board room insiders cannot take advantage of them.

2. Semi-strong Form Efficiency
This is the kind of stock market efficiency where some information is

with-held from the general public. There is thus some form of insider trading. Investors with contacts in the board room can take advantage of other investors since they have information sources that can influence share price movements.

3. Weak Form Efficiency
In this kind of market efficiency, the general public is completely cut out from any privately held information. Their decisions are based purely on information in the public domain which is many a times non-reliable. Insider trading is practiced a lot here. In this kind of a market, a few large investors can influence the direction of share movement in their favor. The small scale investors are therefore left with little information sources on which to base their investment decisions.

Next: Top 50 secondary schools KCSE 2011
Previous: Difference between a bullish market and bearish market

More Resources
Quick Links
Kenyaplex On Facebook

Kenyaplex Learning