Market inefficiency, also known as the least efficient stock market, is a cycle in global trade having great opportunities. Along with them, a dealer has to pay attention to all the risks and things like analytical ability and a plan that helps to purchase and sell at the right time and place.
An inefficient market works in a non-efficient manner because the security price does not trade at its real value. This least efficient rate of tradeable items occurs only when a fresh event or news or any speculation of an event delivers the market with either a high or lower price of the tradable or securities compared with a certain value.
Let’s make it easy by giving an example.
For example, if we talk about the worst market crashes, what comes to mind is the Wall Street Crash of 1929 or Black Tuesday. Investors here traded 16 million approx shares on NYSE (New York Stock Exchange) in one day.
On the next day, rush selling started, and as a result, there were no buyers for the stock. Therefore, the investors couldn’t estimate the real value of the stock, so the panic continued and this event in the period came to be known as the Great Depression.
Not only this, there are several factors leading to the least efficient markets. The two types are as follows: Factors leading to market efficiency are investor-related and external factors.
- Investor related factors
They are solely dependent on the reaction of the investor in the market. Under this, we have
- Price speculation is when the actual price is equal to the share price. This is the case of an efficient market. In some cases, the prices fluctuate due to election results or any such thing. So the stakeholders can buy or sell their shares according to it. This leads to market inefficiency.
- Investors’ reaction to the news of the crisis delay in investor response leads to market inefficiency. It also leads to an impact on the valuation of tradeable items. The delay provides the opportunity for many traders to have favourable returns.
- External factors
External factors are highly applicable as they also affect it seriously.
- Market anomalies due to crisis, it arises due to man-made and natural crises.
- The earnings release is the analysis of a company’s performance over some time.
What causes the least efficient stocks?
- Absence of information
Price decisions and prediction would only be possible if info regarding specific security that fluctuates its prices is available. Hence it is inefficient to estimate the real value of a fiscal asset at a particular period.
- Deferred response to the news
More often than not, large-scale news conditions prices of concerned stocks positively or negatively. Although, in the least efficient market, the asset price only sometimes responds to the news. An observable delay may be noticed. It gives minor players a chance to make a profit. But simultaneously, huge losses can also prevail.