Exchanging Credit

Financial market entails exchanging credit and capital, which essentially consists of capital and money markets. In capital financial markets, long term securities are traded while in money markets, short term securities are traded and are also termed as a safer and a liquidable investment.

For efficiency to be achieved in a market, the current market price should be able to reflect all the public security information available. For the information to easily be reflected in the current price there must be competition. Efficient Market Hypothesis (EMH) is therefore asserts the idea of how speedily an information is used in determining the price of assets at any given moment. The quickness gives the price the authenticity to be used in determining the future prices of assets. In an efficient market, the current price contains all the available data.

EMH is explained in three forms: weak-form, semi-strong form, and strong-form EMH. These are different theories that explain the concept of EMH. They depend on how the information is used to determine the price of securities. it should be noted that EMH does not use technical analysis in determining price. This hypothesis can be termed as the pioneer of the modern financial market theories.

It has however been approached with a lot of criticism from different market researches as ineffective. Many researches have been done to discredit it. Many people have also accused it as responsible for the recent financial crises. This, they argue has been caused by the irrational financial behaviors of unscrupulous investors. Some proponents have also stood to defend it and instead have accused the investors of not getting the market investment information. In conclusion, it should be noted that error in the predictions of the share prices and share return will still be experienced in any type of market due to unavailability of a perfectly efficient market.