Stock Market Efficiency Course Work Example

Published: 2021-06-22 00:18:39
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Category: Market, Marketing, Company, Finance, Investment, Information, England

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Introduction

The sole aim of injecting capital into a stock market it to generate a favorable return on the investment. Many investors not only try gain profitable returns but also try to beat or outperform the market. However, one of the major stock market states that the prices of a particular share or security at a given time fully reflect the available information and data about a specific market or stock. Thus according to this hypothesis, shares and securities prices exclusively respond to the available information in the stock market and since all the participants in the market have equal access to similar information, nobody will really possess the ability perform better or out profit another. This therefore makes the markets efficient.

The information shared is not always necessarily limited to research and financial news. In fact, information about economic, social, and political events in combination with the perception of the investors towards such information is significantly reflected in the price of the stock. In an efficient market, the prices not only gain unpredictability but also become random such that there is no pattern of investment that can be established or distinguished (Groenewold, 2004: 13). Planned investment approaches are therefore not subject to success. This randomness of stock prices leads to the failure of the different investment strategies that may be formulated to try to overcome the market. In fact, it the theory of efficient markets suggests that due to the costs of transactions that are evident in the portfolio management, putting money into index funds is more profitable to an investor.

For markets to gain full efficiency, all the investors must first view the market as inefficient and therefore possible to overcome or beat. Ironically, the investment strategies that are formulated with the aim of taking advantages of the market inefficiencies actually end up being the fuel keeping a stock market efficient (Groenewold, 2004: 25). A market definitely has to be big and liquid. The information should be widely available, that is in cost and accessibility terms. It should be released to the investors at similar times to ensure complete fairness. The costs of transactions should also be relatively cheaper than expected profits from a given investment strategy.

So how does information normally flow in the market? Information flow is paramount in every market including that of the UK. This is because the public and investors need the information in order to make various financial decisions. Most of the information in stock markets is actually released through official news. In reality however, most of this information usually leaks out even before the official news are released. This mainly takes place through rumors in the financial circles. This has particularly been facilitated by advanced technology currently present in the modern world. A good investor is therefore one who constantly keeps his ears up to grasp any new information that may leak to the market.
As expressed earlier, an efficient market is one where the share price movements are exclusively consequences of information in the market. Therefore, in efficient markets, the movements in share prices can be singularly attributed to information. In inefficient markets however, the share price movements can be the result of different aspects most of them being human emotions like personal greed, fear, and negativity and general pressure form peers (Raines, 2000: 78). These emotions are actually destructive to the market and this one of the reasons why market efficiency is actually advocated.

So is the UK stock market efficient? Definitely, this subject has been under a lot of discussion and analysis in many financial circles. Different financial experts have had their say on this and this discussion will go on for a long time. The efficiency of the UK Stock market can be looked at from a host of perspectives. The best would be to choose one company that is actively involved in the UK stock market and use its share prices and cash flow history to analyze the state and efficiency of the UK stock market.
The UK stock exchange is the third largest in the world and probably one of one of the oldest. The stock exchange has attracted very many players in the English market and beyond borders. Cut-throat competition between key economic players characterizes the giant stock market. A high level of market analysis has been a very vital tool in the UK stock exchange. Information pertaining to market changes actually dictates the price shares in the market. Information about the future expected economic conditions largely contribute to the pricing levels of shares in the stock market (Paulos, 2003: 57). Information and intelligent participation is the secret behind the strongest players in the stock market. There are currently about 2938 listed companies in the stock exchange. The market has a value of £3.9 trillion.

Marks and Spencer is one of the key players in the UK stock exchange. The prices of Marks and Spencer’s shares can be used to assess the efficiency of the stock market in the UK From humble backgrounds the company grew into a major force in the food and clothing industry. At the moment, it commands a very big share of London’s food and cloth market. The company is well known for its luxury food, no-frills underwear, and woolen jumpers. The road to success has not been so smooth though. The company suffered major slumps in the 1990s.However the merchandise was able to pick up from the ground and hit back the market, recording the highest share rise in the late 1990s. The company is one of the biggest retailers in London with over 700 stores in Britain and 361 retail stores in over 40 countries across the world. The company majors in clothes and foods .The Company has over the years enjoyed good play in the stock market and is part of the FTSE 100 index. However, the company has had its hard times in the stock market just like any other company.

The gap between the companies sales of the two key commodities is widening .with the freezing weather the sale of clothes has suffered a major blow but the food department has performing quite well. For the last for years, the company has been rocked by unpredictability due to large market fluctuations. Information flows has been one of the most effective tools in the stock market .In the last few days the shares of the much adored retail store has rose tremendously. This has been caused by a speculation that the Qatar Investment Authority had launched a very attractive bid for the Marks and Spencer. The company manages the wealth of the Gulf state. Players in the stock had anticipated too many profits from the sale of the company. If the Marks and Spencer is going to be bought by the Asian giant, then it means that the shareholders are going to enjoy huge proceeds from the sale. However, as of now there are no signs enough to say that the company will be sold.

A similar scenario was observed early last year after the company recovered from a major financial setback, which was occasioned by the decline of general sales of the company. In mid last year, the group sales of the Marks and Spencer rose by 0.95% to hit £4.7 billion. The company’s CEO Bolland attributed this to measures undertaken to boost the company’s merchandise. He said that he was pleased by the outstanding performance of the food department of the company. The first half of the year attracted many buyers since this was a big sign for future improvement of the company. During this period, the company enjoyed a 3.6% rise in international revenues. In a press issue, the company pointed out that the growth in company’s share and increase in share index is attributed to more variety and choice that followed the introduction of 1000 new lines. The company is now making major strides in becoming an intercontinental multi-channel trader. Last year the company promised to deliver a big festive offer during the charismas .However this did not leave to be as the company witnessed a major loss of £270 million the stock market. This instilled fear on prospective buyers .This fear led to stagnation of its shares during the better part of January and February this year .However has mentioned earlier, the company share market came to its feet again after the a launch of a major bid.

It will be remembered that the company registered a significant rise in the early 2009.During this period a talk on pension deal had saturated the stock market. The company had reached an agreement with trustees that it was going to finance annuity deficit for over 10 years. This deal implied that the company was going to be sold to private investors. The group’s shares shot to 3.7 % .During this period the shares jumped to 392 pence in the first 3 months after the speculation. This was followed by a decline to 387.8 pence. This was due to what analysts described as doubting of the speculation. At the beginning of this year there was a speculation that the food and cloth retail was facing a major threat from its key competitors in the market. These include JD Sports fashion and the Tesco. The two companies were rising at a very alarming rate and every player felt their forces within the stock market. To react to this the Marks and Spenser reacted by diverting away from the share market profits to promotion. Cording to analyst Frazer Ramsan an analyst, the step that was undertaken by Marks and Spenser could not address short-term problems but could secure a bigger share market for the company.

The return rate of Marks and Spencer shares rose up by 24 % in the year 2012. This was after the company had gone through an extensive period of share price degradation. For almost a decade, Marks and Spencer had been having maximum share return of 1.9% annually which is significantly lower than the 7.9% rate of return on FTSE 100 ( under the assumption that the dividends accrued were reinvested).
Therefore, the 4.3% rate of returns witnessed in 2012 is a clear indication of the growth of the country. This rate is very favorable and attractive in today’s returns rate environment. In spite of toughness of the toughness present in the modern retail market, there is no clear-cut indication that the Marks and Spencer’s cash flows face any threat.

Although some investors view the growth rate of Marks and Spencer as uninspiring, the company has consistently delivered a 6% dividend increase over the last decade (Eckett, 2004: 67). This can thus lead to the development of an argument of holding on to shares simply for the income they generate.

There has been debate and questions regarding the efficiency of the UK stock exchange. Many people have argued that the bad performance of major players such as Marks and Spenser can be attributed to the myopic nature of the stock market. Research has shown that the UK stock exchange places more weight t to current dividends than the effective market hypothesis would recommend. However, econometrics has disputed claims of any myopic aspects in the stock markets. Chief economists argued that the problem lies with the buyers who value the securities on what other people think they are worth instead of using the fundamentals of economics in valuing assets in the stock market.

References

Keane, S. M. (2000). Stock market efficiency: Theory, evidence, and implications. Deddington, Oxford: P. Allan.
Barnes, P. (2009). Stock market efficiency, insider dealing and market abuse. Farnham, Surrey, England: Gower.
Lo, A. W. (2001). Market efficiency: Stock market behavior in theory and practice. Cheltenham, UK: Edward Elgar Pub.
Market efficiency: stock market behavior in theory and practice: 1. (2010). Cheltenham: Elgar.
Market efficiency: stock market behavior in theory and practice: 2. (2002). Cheltenham: Elgar
Dow, J., Gorton, G., & National Bureau of Economic Research. (2001). Stock market efficiency and economic efficiency: Is there a connection?. Cambridge, MA: National Bureau of Economic Research.
Paulos, J. A. (2003). A mathematician plays the stock market. New York: Basic Books.
Raines, J. P., & Leathers, C. G. (2000). Economists and the stock market: Speculative theories of stock market fluctuations. Cheltenham, UK: Edward Elgar.
Dimson, E. (2000). Stock market anomalies. Cambridge [Cambridge shire: Cambridge University Press
Eckett, S. (2005). The UK stock market almanac 2006: Facts, figures, analysis and fascinating trivia that every investor should know about the UK stock market. S.l.: Harriman House. Connolly, D. (2007). The UK trader's bible: [the complete guide to trading the UK stock market]. Petersfield, Hampshire: Harriman House
Groenewold, N. (2004). The UK stock market: Efficiency, predictability, and profitability. Cheltenham, UK: Edward Elgar.

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