Stock Market efficiency (Marks and Spencer) Essay

Stock Market efficiency (Marks and Spencer) - Essay Example Proponents of the efficient market hypothesis suggest that the market has a large number of players out to maximize profits. Each of these players logically analyzes the market information available so as to make an informed investment decision. This ensures that the market quickly and fairly represents all the available market in the prices of securities. There are three types of market efficiency; allocation efficiency, operation efficiency and pricing efficiency (Kraakman, 2003, p.11). Operational efficiency refers to the transactional costs involved in the selling and buying of securities. The operation of the London stock exchange is streamlined and well aligned to ensure operational efficiency. Allocation efficiency follows the premise that there are limited financial resources and therefore the existing resources are invested in the most productive way (Cassedy, 2004, p.6). This suggests that the investors are rational and that available capital is directed to the most profitable stock. Pricing efficiency is based on the premise that the stock fairly and instantly reflects information available in the stock market. Most of the theories developed in the area of market efficiency revolve around pricing efficiency. Pricing efficiency suggests that a security’s price reflects all the available information. Market efficiency can be said to exist in three distinct levels. These are Weak-form efficiency, Semi-strong efficiency and Strong-form efficiency (Banks, 2011, p.3).   The weak-form efficiency suggests a market that reflects all the past market information. The past information is fully and instantly reflected in the price of securities. This view therefore suggests that the past market information cannot be used to predict future prices of securities. This is because listed financial securities already reflect all past market data. Semi strong