These theory states the relationship between quoted shares prices and the information published by the group or firm.
A security analysis involves the process of processing information concerning a firm so as to arrive at a point whereby an estimate of return is predicted, and risk characteristics of the security is ascertained. Information is very important, especially when it has to do with the security, stock of a firm. Because whatever is published would be used and relied upon by the general public. In all information, the return on stock or security whether qualitative or quantitative must be indicated. Therefore the risk would be down to the investor.
Below are the approaches to security analysis:
- Efficient market theory
- Technical analysis
- Random walk hypothesis (Efficient market school)
- Fundamental analysis.
The Fundamental Analysis school of thought has challenged the technical analysis due to the emergence of market efficiency school of thought. This school of thought believe that every stock in an exchange market has a valuable. Worth and should be estimated before going into investment. Taking into consideration, two important factors namely:-
Economic Factor
Financial Factor.
Efficient Market School: Experts regarded as academician doesn’t believe in the fact that stocks price can be predicted as a result of past prices. It is concerned about whether or not; it is possible to predict future prices. Using a statistical technique or method known as the serial correlation, they found out that price changes are independent of past prices changes and thus they argued that it isn’t possible. They believe that present prices of stock are the best form of prediction.
Technical Analysis: They believe that securities market such as bond, stock are inefficient in pricing the security. They say there is difference between the worth of a stock and the market price of it. These school o thoughts consist of professionals, argued that past prices of stocks can be used to predict the future prices. They used several services of charts and also proved that history repeats itself.
Efficient Market Theory (hypothesis): In an attempt to find an explanation for random walk, they produced these theories. They say stock markets have characteristics of perfectly competitive markets such as:
- Large number of buyers and sellers
- No restriction entry
- No single seller can influence price
- Homogeneity of prices
- Information
Below are three forms of efficient market hypothesis:
- Weak form: reflects the difference between past and present prices
- Semi Strong: Level of efficiency of available information
- Strong: the stock market
