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...

Find Another Essay On Predicting Stock Market Return

COMPARING THE PERSISTENCY OF DIFFERENT FREQUENCIES OF STOCK RETURNS VOLATILITY IN AN EMERGING MARKET: A CASE STUDY OF PAKISTAN

2718 words - 11 pages in the volatility is due to the different reasons and it varies from country to country and time to time. Batra (2004) investigated Indian stock market from 1979-2003 and concluded that stock return volatility persistence is increasing on account of financial liberalization process. Persistency is found to be the characteristics of each and every stock market of the world. Floros (2008) found persistence for Egypt and Israel stock markets and

Can above-average returns be earned on observing stock market overreaction?

9651 words - 39 pages serial correlation coefficients for the daily changes to be small, the average being 0.03 (Rutterford, 1993:285). Both tests revealed extremely low values, indicating that data on weekly changes is valueless in predicting future price changes.Similarly, academic statisticians suggested that apparent patterns in stock market prices occur purely by chance and that trends are no more significant for predicting the next price movement than the

The I.P.O. Mania

3495 words - 14 pages technology-related (Petruno 1). The average I.P.O soared an astounding 57% on the first day of trading, and we thought there was nothing suspicious about companies being valued in the billions of dollars when they didn't have a dime in profits.We, the champions of the economy, thought nothing, not even G-d himself, could hamper the direction of the stock market. It was not long ago that economists and financial advisors alike predicted the Dow Jones

How can stock index futures be used for hedging?

1708 words - 7 pages "points" which are used for share index.4 Stock index futures contracts is a kind of futures contracts which is in terms of cash transactionFuture Hedge, it means in order to lock spot purchase costs or profits in the futures market to establish a certain amount of the cash and futures positions in the opposite direction of the position. To use the futures-related losses to offset or compensate for the spot transaction on the profit and loss, so

Stocks: Fundamental Analysis

2512 words - 10 pages People are always interested in different ways of earning money and actually this aim can be met not just by hard work, spending many hours on a particular job. There are other different ways, which actually also require some effort, but of the other kind. One of them is stocks. Playing on the stock market can give a person an opportunity to win much, though it can also leave him with huge losses. So, in order to be successful a person needs to

Application of the C.A.P.M. on NYSE & NASDAQ Stocks: Toyota in NYSE

545 words - 2 pages factor of the stock) and the expected return of the market. The model has as follows:After analyzing and solving this formula, one can get the expected return that we await from the company that is being analyzed in each situation. In this case, the expected return of Toyota is being analyzed.AnalysisStarting from the risk free rate, we have the rate at which one can invest in an investment with no risk. Of course, there is no actual investment which

Mini-Case Problem: Executive Fruit

1332 words - 5 pages market climbs and Lenders/investors, start making a higher rate of return investing in the stock market the general direction of interest rates will raise. This is due to two main reasons. The stock market usually starts climbing due to the expectation the economy is improving and that companies will have increased earnings, driving stock prices higher. In addition, the supply and demand factor comes into play as Lenders/investors pull money out

Stock Markets: Effective in Promoting Economic Growth?

1357 words - 5 pages role of liquidity in stock market by examining 38 countries between 1976 and 1993. He finds that the liquid the markets were, the more the faster the growth were in future. Stock markets will also improve proficiency of managers by easing takeovers. Bencivenga et al. (1995) argues that transaction costs have implication on growth through the channel of technology’s choice. By reducing the transaction costs will increase the rate of return on

Wise Investment to Reach Financial Security

993 words - 4 pages is no risk of losing your money. But wait, do term deposits give you a big return from the money you invested after waiting a long period of time? If you are a type of person that can accept a higher risk, you can invest your money in a stock market. In the financial market, stock refers to a supply of money that a company has raised. It comes from people who have given the company money in the hope that the company will make their money grow

Wise Investments to Reach Financial Security

993 words - 4 pages is no risk of losing your money. But wait, do term deposits give you a big return from the money you invested after waiting a long period of time? If you are a type of person that can accept a higher risk, you can invest your money in a stock market. In the financial market, stock refers to a supply of money that a company has raised. It comes from people who have given the company money in the hope that the company will make their money grow

Stock Price Valuation and Beta Calculation

1247 words - 5 pages the change of technology. Equity market is one of the well performing markets. The companies raise fund from the public by listing themselves in the stock exchanges. Such objective can be done by distributing the common stock, preferred stock, and convertible securities. The voting rights, priority claim, ownership, and types of compensation are determined by their characteristics. The investors will purchase the stocks based on their requirements

Similar Essays

Stock Market Predictability Essay

1034 words - 4 pages I will now examine the effectiveness of the Book to Market ratio in predicting stock market returns. The Book to Market ratio is used to compare the book value and the market value of the firm. The book value is calculated by the firm’s accounting worth. The market value is determined by the market capitalization in the stock market. It is then found using the formula, Book Value of the firm / Market Value of the firm. Its purpose is to identify

The Tests For Market Efficiency Essay

2337 words - 9 pages means that neither the fundamental analysis related to analysis of financial information of the company such as earnings, capital stock etc nor the technical analysis related to the analysis of historical performance of the stocks of the company enables the investor either experienced or not to get return over and above the average return of the market by holding any portfolio of stocks with average market risk. A random walk and efficient

Market Efficiency Essay

2314 words - 9 pages information. Therefore, none can take advantage on the market in forecasting prices because there would be no additional data that would provide any advantage to the investors. Stock Market Predictability Stock market prediction is the method of predicting the price of a company’s stock. It is believed that stock price is lead by random walk hypothesis. Random walk hypothesis states that stock market price matures randomly and hence can’t be

Bubbles In Stock Markets Essay

1586 words - 6 pages some irrational exuberance in order to explain the bullish stock market during the late 90s.      Psychological experience shows that there are patterns of behaviour in the stock market which cannot be contributed to ignorance, but which nevertheless cannot be classed as rational behaviour. People tend to use past prices as anchors for predicting present prices, so when certain shares are seen as valuable, people tend to