Stock markets play a crucial role in cementing the relationship between investors and the corporate sector. In this process, they help mobilizing the savings of people and direct them to the growth of trade, commerce and industrial sectors of an economy. In a nutshell, stock markets play an important role in capital formation and help fuel economic growth in the country. Looking at it from the investors’ point of view, stock market operations are often compared to operations in gambling dens, and the investors look for the right winning strategies applying innumerable techniques and methods (Ranganatham, Madhu Dr Rengasamy Elango, Faculty, Dept. of Business and Accounting, Majan College, (University College), email: email@example.com; firstname.lastname@example.org Dr Mohammed Ibrahim Hussein, Faculty, Dept. of Business and Accounting, Majan College, (University College), email: email@example.com; firstname.lastname@example.org
Electronic copy available at: http://ssrn.com/abstract=1026569
mathi R, 2005)The ultimate objective, of course, is to beat the market despite the fact that most often investors are guided by the sentiments of faith and phobia. However, rational investors like to play safe and invest their hard-earned money optimally. Those investors look for organized information and logical reasoning backed by scientific methods and techniques. Since the two prime considerations of a judicious investor are the risk and return inherently present in a security, a guidance on choosing the right stock based on a scientific method would be a boon to the investors. Efficient Market Hypothesis (EMH) The principal issue from an academic viewpoint is market efficiency (Fama 1970, 1991). The Efficient Market Hypothesis (EMH) assumes that stock prices adjust rapidly to the new information, and thus, current prices fully reflect all available information. (Fama 1970), formalized the theory, organized empirical evidence and divided the EMH into three sub-hypotheses depending on the information set involved. It is an important concept, both in terms of an understanding of the working of stock and in their performance and contribution to the development of a country’s economy. If the stock market is efficient, the prices will represent the intrinsic values of the stocks and in turn, the scarce savings will be optimally allocated to productive investments in a way that benefits both individual investors and the country economy (Copeland and Weston, 1988). The...