Stock Markets Essay Example | Topics and Well Written Essays - 1500 words

pullulate Markets - Essay ExampleHypothesis being the Greek word for assumption, the good Markets Hypothesis therefore assumes that capital markets, of which the stock or equity market is one, is efficient. And what we mean when we say that a market is efficient is that buyers and sellers of stocks have each(prenominal) the applicable information they need to tiller an intelligent decision to either buy or sell stocks in companies at a certain price that reflects all available information.The first to propose the hypothesis is Eugene Fama of the University of Chicago in a paper (1970) where he presented a method of testing the efficiency of the New York Stock Exchange. Since then, hundreds of studies have been conducted to either prove or disprove the hypothesis. Since we know that in science, a scientific hypothesis that survives experimental testing becomes a scientific theory, the accompaniment that the efficiency of markets remains a hypothesis begs the question whyDo test results thus far show that capital markets be inefficient because scientific investigation has not proven otherwise Or, if capital markets are efficient, and stock prices reflect all available information, then why is the trade on untarnished pieces of paper (called stocks) growing Is it a case of altruistic holders of stocks, seeing the potential for future earnings, selling these stocks to others in order to share the wealth Or are all sellers of stocks just looking for another fool to unload a worthless piece of paper And why do people still make (and lose) money in the stock market And if capital markets are efficient, are all investing decisions intelligent and based on complete information As we will show, capital market efficiency does not necessarily mean an increase in the intelligence quotient of all investors.Power of Information in corking Markets TodayCapital markets have the advantage of getting buyers and sellers to agree on a deal without the use of financial inte rmediaries like banks and insurance companies who direct the execute of resources from savers to borrowers. Capital market transactions are therefore deemed more efficient in the absence of intermediaries except for brokers who put buyers and sellers together and get a teensy commission for the effort, making the deal almost frictionless. This is one factor that leads to our hypothesis the low transaction costs of capital markets enhance its efficiency.With transaction costs negligible, the simply real factor that determines the current price of a stock should be the net present value of its future cash flows in the form of dividends and, assume the company lasts long enough, capital gains when the stock is sold at a future date. After all, a stock is nothing else but a asseverate to a companys future cash flows.A companys cash flow is affected by several factors, among which are its business prospects, management quality and strategic plans, the economys over-all performance, and the companys rest within the economy. If all these pieces of information are known, making a study of free