Predicting Stock Market Return Essay

2107 Words 9 Pages
Stocks are classified as the part of company’s ownership. Once individuals purchase stocks they are buying the venture in the company’s assets of earning. Many large companies needs fund to expand, therefore they sell their ownership in forms of stock. The more stocks bought by individuals the more ownership owned in the company. One of the main advantages in this investment is the limited liability, if goes bankrupt you are not liable for any loss. Moreover, stocks associate with risks and rewards (Amadeo, 2011). It is very crucial to understand the risks and rewards involved in this type of investment. It is a fact that all investments carry a degree of risk. The most common threat in stock investment is about losing money (little, …show more content…
Furthermore, some authors have agreed to equate the comparison of stock market efficiency with the non-predictability property. However, this debate has no satisfactory results and this has also not specified the achievement of understanding market functions. Obligations of the hypothesis of market efficiency need to be assigned independently from the predictability of stock market returns. But actually it can be observed that stock market returns will only be non-predictable if market efficiency is associated with risk neutrality. In addition Eugene Fama (1970) formulated the efficient market hypothesis (EMH) which analysed that the given time and the price entirely reflects all the required information on selected stocks or markets. According to efficient market hypothesis it is impractical to beat the market as stock market efficiency aims existing share prices to consistently incorporate and reflect all the necessary information. Efficient market hypothesis challenges that stocks are regularly traded at their fair value in stock market hence, making it inaccessible for the investors to either invest in undervalued stocks or exchange stocks for inflated prices. But in modern financial theory it has been argued that efficient market hypothesis is highly uncertain and often questionable. Thus, the followers of modern financial theory affirms that it is pointless to find the undervalued
Open Document