How does one make profit given the following situation?

[DionysusToast]

This guy is right..Markets are in fact efficient and "fair value" will always be the last traded price..!

The markets are not efficient. If they were, the price would not change every second.

In EMT, for the price to change, the masses would be taking on board all information about the company and the market and re-pricing the stock in light of that information.

This is of course, not even remotely close to what happens.

Efficient Markets are a myth.

In terms of the right thing to do in this scenario - if you have a reason to think the stock will either...

1 - Move in a specific direction
2 - Not move at all or stay within a specific range
3 - Move but you aren't sure in which direction

Then you can place a trade accordingly. If you don't have a reason to think either of the above would be likely enough to happen to take a trade, you'd do nothing at all.

 

[Jack Hughes]

How does one make a profit in this situation?

Jaydee has it right, I think. If a share has a spread that wide, the way to make a profit is to find something else to trade. Why waste time making life more difficult?

 

[mb325]

The markets are not efficient. If they were, the price would not change every second.

Just postulating here but I would say that the very fact price changes every second is a sign that the markets ARE efficient, or as efficient as they can be. If something is as efficient as is possible, does this mean it is definitively 'efficient'?

 

[DionysusToast]

Just postulating here but I would say that the very fact price changes every second is a sign that the markets ARE efficient, or as efficient as they can be. If something is as efficient as is possible, does this mean it is definitively 'efficient'?

Most of the time, when people discuss market efficiency, they are referring to Efficient Market Theory/Hypothesis. The long and short of that is that the market is constantly taking on board new information and pricing securities accordingly.

This makes the presumption that the markets react rationally and make sane pricing decisions based on the incoming information.

Also - the market doesn't really make pricing decisions. If 'the market' decided the 'efficient' price is $25.80 and the current price is $25.20, then you would have a stampede on your hands which would push the price well past the 'efficient' price.

Price is really the result of people buying and selling and not something that is decided by any participant. Of course the exception of that would be Market Makers and Floor Specialists.

Of course, the markets are certainly well oiled machines that let you trade in fractions of a second, ticking up and down accordingly but this is not generally what people mean by efficient markets.

 

[arabianights]

For EMH to be true it doesn't matter that prices are changing constantly; the point is that they should be a random deviation from the fair price.

 

[DionysusToast]

Tell the Market Makers that !

I thought a random walk was what happened after 10 pints of lager and loosing your car keys.