Ready101 Apa 200 words or more 2 refs
Apa 200 words or more 2 refs
The Efficient Market Hypothesis was created by Eugene Fama in the 1970s. The Efficient Market Hypothesis maintains that all stocks are perfectly priced according to their inherent investment properties, the knowledge of which all market participants possess equally (Bergen, 2011). It assumes that all investors perceive all available information in exactly the same way. One argument against the EMH is that one investor can look for undervalued market opportunities while another looks for a stocks growth potential, these two investors will already have a different assessment of the stock’s fair market value. This proves that since investors value stocks differently, it is impossible to ascertain what a stock should be worth under an efficient market.
Financial statement analysis is the process of reviewing and evaluating a company’s financial statements (such as the balance sheet or profit and loss statement), thereby gaining an understanding of the financial health of the company and enabling more effective decision making. Financial statements record financial data; however, this information must be evaluated through financial statement analysis to become more useful to investors, shareholders, managers and other interested parties (“Financial Statement Analysis, 2017”).
An investor can have a significant advantage if they allow financial statement analysis because it will show their financial position at that given time to help make decisions on what to do in the future. They can properly value a corporation.
“The efficient market hypothesis (EMH) is an investment theory that states it is impossible to ‘beat the market’ because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information” (Efficient Market Hypothesis, 2016, para. 1). Therefore, suggesting that the price of stocks will always be traded at its fair value (Efficient Market Hypothesis, 2016, para. 1). Consequently, if stocks are always traded at fair value, it makes it impossible for investors to purchase “undervalued stocks or sell stocks for inflated prices” (Efficient Market Hypothesis, 2016, para. 1). The efficient market hypothesis comes with a ton of controversy, since many people view the topic as illogical to try to beat the market (Efficient Market Hypothesis, 2016, para. 1).
Investors often turn to companies’ financial statements to determine its liquidity, efficiency, and profitability of any given company to decide whether it wants to invest in it (Griffin, n.d., para. 4-6). The evaluation of financial statements can indicate whether a company is moving its inventory fast or slow, if a company is “efficient at creating profit on the return on assets,” etc. (Griffin, n.d., para. 5-6). However, while the financial statements tell a lot of pertinent facts about a company it does not tell absolutely everything. Companies can manipulate its financial statements to appear it has a better financial position than it actually does (Griffin, n.d., para. 7). In addition, the market could change at any given time due to a product being a fad or even the state of the economy (Jane, n.d., para. 2). It would be unrealistic for every company to believe just because it sold a ton of inventory in one year that it will do the same in the next. Nothing is guaranteed.