Predicting Stock Market Return Essay

2028 words - 8 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, 2011). Moreover, stocks are bought and sold in a specific place called stock Market which is conquered by traders who hypothesize on price of shares to make profit. Shares themselves are intangible assets and the annual profit paid out is called dividends. Moreover, the price of share depends on the supply and demand within the market. Stocks are valued by two types, first by cash flows, sales or fundamental earning analysis and second valuation is the amount an investor is willing to pay for stock and the other investor is willing to sell stock for a particular price or demand and supply of stocks (freefinancialadvice, 2002). Predicting stocks is one of the controversial issues in finance.
This particular essay will focus on predictability of stock market returns and market efficiency with variety of financial and macroeconomics variables that includes dividend to price ratio, earnings to price ratio, book to market ratio, consumption to wealth ratio, short term interest rates and dividend yield.
The dispute has arisen that in an efficient stock market it has not been possible to predict stocks, due to the failure of stock market variables not being statistically considerable. 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...

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