How Investing Works
“In an efficient market, price fully reflect available information.”
– Eugene Fama
Professor of Finance
University of Chicago Booth School of Business
A lot of people talk about the market.
But what does that mean?
The financial market is made up of millions of participants, many just like you.
Buyers and sellers who voluntarily agree to trade shares of companies all over the world.
Every year, millions of trades take place each day, totalling billions of dollars.
The collective knowledge of all those participants is powerful.
Here’s one example. A group of people were asked how many jellybeans were in a jar. There was some guess too high and some too low. But the average guess was remarkably close to the actual number of jellybeans.
Together, we know more than we do alone.
In the same way, think of the stock market as a large information-processing machine, that takes in all available information about a company. All this information impacts the price of the stock.
No one can really know if that price is right, but thanks to the markets processing power, we can treat the current price as the best estimate of its actual value.
Stock prices are like other prices. They move up and down based on new information. Market participants quickly respond, and prices adjust.
So, to get ahead, you need to be able to predict where prices are going, right?
How many times have you manoeuvred to stay in the fastest lane of traffic, only to find yourself at another standstill?
You added anxiety, risked getting into an accident and may or may not have gotten ahead.
In the same way, trying to anticipate the movement of the financial markets add anxiety and unnecessary risk.
The point is, when you try to predict the market, you are competing against the collective knowledge of all those millions of buyers and sellers.
Instead, harness that collective knowledge for your portfolio and invest with a firm that will put the power of the market to work for you.
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