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Stock Market: Gamble Money Or Ample Money?

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A question we have been hearing and reading about for years and might continue to hear for decades to come, But The Nobel Laureate Eugene Fama Worked a Lot towards establishing a theory which explains the working of efficient Capital Markets. Eugene Fama was a pioneer in it and helped us establish between the markets and rationality. Highlighted by several economists and finance moguls it has been considered gambling for quite some time now, but are these people honest or biased because they just have made losses? The primary aim of efficient markets is Distribution of ownership among different individuals since they can’t engage in all growing and flourishing business and make everyone a part of the economy and the growth Story.

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But Do the Price reflects all factors? This is what Fama believed and proved in this prudent theory, Fama also stated that Active investment has often been understood as a zero sum game because mutual funds have generated negative returns, actively managed funds even more and basically leads towards a approach called Random Walk which states market prices move like a random walk of a drunken man. Markets are often simpler with less research as under valuation and over valuation works and markets reacts to past returns a bear run is always followed by a bull run and vice versa. Because something which is gambling would not contribute to 14 Richest Man in The world out of top 100 operating in this sector and drawing there wealth from the stock market. Another very simple concept is value stocks and growth stocks, some stocks which will always be valuable as are part of basic life and stocks which due to innovation are going to be growing at a rapid pace for following years.

Fama also Highlighted that Emerging capital markets and transforming economies are often rich in growth stocks and developed countries have more value stocks but with a larger risk reward ratio. But The Stock Market has been very much inefficient in predicting the Global Recession and several Political Turmoil’s which led to loss of billions for investors as price never reflected the economical turmoil coming or going on and suddenly just over a few days wealth accumulated over years was destroyed. But Contrary to it In the extreme, all a market needs in order to be efficient is an epsilon (a tiny proportion) of wealth held by perfectly informed investors who trade actively and aggressively which brings experience and maturity in the market because seasoned investors have lesser bias towards speculation and more towards systematic and fundamental investing. If an efficient market needs more good active investors, it is to correct the mistakes of bad active investors.

Also perfectly informed investors depict that a particular set of information was available through which they were able and fair game was practised. Fama was very close to devising the market theory but even this theory was not able to rule out the effects of public announcements whether economic or political, external sources such as impact of one country on another. Information and selling pressure also adds to some irrationality among individuals and leads to contrary movement compared to what Fama said as commissions, brokerages are also factored in which are modern days costs and leads to day to day price changes.

11 February 2020

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