Stock Exchanges and Stock Martet Efficiency

In order to discuss the stock exchanges and stock market efficiency, it is necessary to talk about the capital market first. In the current fast moving economy situation, capital market plays a significant role for all investors. It is running between the two important components, saving and investment. Capital market is financial market for the buying and selling of long term debt or equity backed securities. It as broker exists between the investors and ultimate borrowers. If there is no capital market, business probably is running with high risk and low liquidity. The modern method to reduce risk and increase liquidity is selling shares and bonds to investors. The “broker” will assist business to transform asset through offering securities. In addition, capital market brings benefit to three fields: economy, savers and companies.

As a part of capital market, the stock market is doing the similar things. They both are serving a common purpose of providing a mechanism which to assist firm raise capital for their business operation. And capital market is including in stock market and bond market. The stock market is the only platform for trading shares. However, the business operation good or bad is linking with their share price. The share price increasing, investors could obtain more profit, and the share price fall, investors might loss. Therefore, gaining information from the company and the prospect of company operation is important. Fama (1970) has identified three forms of stock market efficiency based on efficient market hypothesis (EMH):

The weak form efficiency which claims all past prices of a stock are reflected in today’s stock price. So technical analysis cannot be used to predict and beat a market, but investors could seek profitable companies can earn profits by researching financial statements.

The semi-strong form efficiency is implies all public information and history is calculated into a stock’s current share price. Therefore, the fundamental and technical analysis can be used neither to predict market.

The strong form efficiency is states all information in a market, whether public or private, is accounted for in a stock price. This degree of market efficiency implies that profits exceeding normal returns cannot be made, regardless of the amount of research or information investors have access to.

Based on the news of Sony’s Smartphone Gambit which be found on the website of Wall Street Journal, the stock price of Sony has fell 10% to ¥1,365 after the company reported a net loss of  ¥10.8 billion for the three months through December. This could be a kind of evidence to prove Sony Company is running by semi-strong form efficiency. According to the BBC news of Sony shares slump 10% after reporting losses, this was the biggest fall from company joint Tokyo stock exchange and this drop was react quickly and rationally. In addition, the Sony’s Smartphone Gambit points out that Sony shipped 9.8million smartphones and its global market share rose to 4.5% from 3.9% a year earlier. Therefore, the Efficient Market Hypothesis of Sony is semi-strong form efficiency.