More important stock investing concepts
Beginner Stock Market Investing, Stock Market Investing Advice
The Random Walk Theory.
In 1973, Burton Malkiel wrote a book called “A Random Walk Down Wall Street”, which is now regarded as one of the most influential books on stock market investing. In its essence, the Random Walk Theory states that the past movement or the past trend in the price of a stock or of the overall stock market is not a basis for predicting future movements of trends. In other words, price fluctuations tend to occur independent of other price fluctuations and have exactly the same probability characteristics. In the long run, however, prices will tend to maintain an upward trend. The core of this theory is that stock prices are completely random and cannot be predicted and the chances of a stock going up at any point of time are exactly equal to the chances of the stock going down.
Investors who follow this theory believe that they cannot outperform the market unless they take an additional degree of risk. The book proposes that both technical and fundamental analyses are largely a waste of time and there is insufficient historical evidence to establish that either works. In other words, Malkiel believes that the only long-term investment strategy that works is value investing and that the investor should follow a buy and hold strategy. Any attempt to time the market based on technical or other analysis is simply not going to work. He points out the fact that many mutual funds consistently failed to outperform the market indices.
Many people believe that things have changed considerably since the time the book was written and in the past few decades, access to information and knowledge has become far easier and quicker for every single investor. This access is no longer the privilege of a few large investors. Wall Street has never liked this theory because it dismisses things like investment analysis and stock picking which skills that Wall Street prides itself on.
The Efficient Market Hypothesis.
This is a highly controversial and debated theory because it states quite simply that you cannot beat the market because the market price already incorporates all the necessary information. In other words, it is futile to search for undervalued stocks through the use of fundamental technical analysis. This means that investment in the stock markets is reduced to a gamble or a game of chance rather than the use of any skills. If the markets are truly efficient as this theory suggests, there is no such thing as a bargain stock.
Technical analysts (who would be out of business if this hypothesis were true) oppose this theory on the grounds that there are no efficient markets in the real world. Markets are made up of people and investor sentiment plays an important part in determining trends and prices and which way the market is going to move. Because of this human element, prices cannot be the sole determinant of the market. It therefore makes sense to believe that because investors look to the past to predict the future, past prices and trends and to influence the future movements of the markets.
Tags: investing for beginners, online stock market investing, Stock Market, stock market for beginners, Stock Market Investing, Stock Market Investing Advice