Three years back I came across the concept of stock markets and trading shares on a stock exchange. The way the markets worked and the fancy sounding jargon baffled me. What fascinates me about the markets is the fact that, traders know that the markets are inefficient and ill informed and that is precisely the reason why they enter the markets. In my quest to try and understand the markets better (or so I assumed), I read a lot and a particular theory on Efficient Market Hypothesis caught my attention.
It states that the markets work because of Noise Traders who are traders who do not have any specific information about a security. These traders add liquidity to the market while keeping the valuations undistorted. A well informed trader will never enter a market which is starved of noise traders because it would be impossible to profit from such a market. A volatile market means that the chances a day trade not being turned into a delivery are very high. Moreover, it’s easy to infect the market with conditioned news with the presence of noise traders. So amongst the illiterates the one who can spell "I" is the king.
But like any theory, the experts in the field of Behavioral Finance are divided in their opinion about noise traders. Many say that these noise traders affect the markets ability of arbitrage to a large extent. What I personally feel is that the noise traders are not so much so affected by conditioned news from a well informed trader, as much by their belief of an internal market inside their heads.
It states that the markets work because of Noise Traders who are traders who do not have any specific information about a security. These traders add liquidity to the market while keeping the valuations undistorted. A well informed trader will never enter a market which is starved of noise traders because it would be impossible to profit from such a market. A volatile market means that the chances a day trade not being turned into a delivery are very high. Moreover, it’s easy to infect the market with conditioned news with the presence of noise traders. So amongst the illiterates the one who can spell "I" is the king.
But like any theory, the experts in the field of Behavioral Finance are divided in their opinion about noise traders. Many say that these noise traders affect the markets ability of arbitrage to a large extent. What I personally feel is that the noise traders are not so much so affected by conditioned news from a well informed trader, as much by their belief of an internal market inside their heads.
3 comments:
Creating a positive noise helps.
I think its the traditional criteria that has accepted by market for long but practically its of no use.
ya...quite true tiger and OSB...but this is what makes the markets fun to trade in..
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