Question

As an investment adviser at the brokerage firm of Smyth Barry & Co. Your first assignment is to explain the nature of the U.S. financial markets After your consultation with the client, they ask to discuss these two scenarios with you:

a. While in the waiting room of your office, she overheard an analyst on a financial TV network say that a particular medical research company just received FDA approval for one of its products. On the basis of this “hot” information, Michelle wants to buy many shares of that company’s stock. Assuming the stock market is highly efficient, what advice would you give her?

b. She has read a number of newspaper articles about a huge IPO being carried out by a leading technology company. She wants to get as many shares in the IPO as possible and would even be willing to buy the shares in the open market immediately after the issue. What advice do you have for her?

Answer 1

A:

As per the efficient market hypothesis, the asset prices fully reflect all available information. Since the FDA approval information is public knowledge the share prices would have already risen and so it may not be too beneficial to purchase the shares on the basis of this data.

B:

She should first study the company and the market in general. She must conduct intensive research as to the prospects of the company as well its future growth areas. Market analysis and company analysis must be performed in depth before the IPO is purchased.