Are There Really Any Stock Exchange Secrets?

Trying to look for stock exchange secrets is a good idea. It is a question that would require quite a lot of answering. Over the next few pages I shall try to pull back the curtain a little for you.

Needless to say, the answer is both 'yes' and 'no', as unhelpful as that may be...

The first piece of the puzzle that you need to understand is something called 'Efficient Market Theory'. This is a rather complex but ultimately simple economic theory.

Much of EMT was first presented by Eugene Fama, an economist based in the United States.

To paraphrase, it presumes that any and all information about a market, sector or security is known by all participants and that they can therefore make their decisions to buy or sell an asset in full knowledge of market information.

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In theory, it sounds great. Information is released and eveyone knows everything they need to know and can make informed choices. In other words, there are no stock exchange secrets.

As great as this may be in theory, I think we all realise that very few (if any) of us actually know everything. If that 'everything' actually relates to a very limited sphere, one company for example, there are still likely to be very few people who know all there is to know. Depending upon the business, maybe even the company chairman does not know everything. If that is the case, what chance does the average buyer or seller of a share have?

Warren Buffett makes fun of Efficient Market Theory. His general point is that if it works and is true, how come he is so rich? You might call that a powerful argument. I do.

The problem for the average buyer and seller of stocks is that there is more information available that he or she may have access to. For example, many fund managers or analysts will meet the management of companies in which they own sizeable holdings. Though the management are not allowed to give away any secrets that the 'market' is not already aware of, could it be possible that a fund manager could get a better understanding of a business than we could from an annual report?

So there might be some stock exchange secrets after all...

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And then there are the company Directors themselves, they must know more about a company than the general public does. They would be recklessly incompetent if they didn't. Of course, if they trade on that knowledge, it is illegal, but how many members of staff might buy and sell in very small amounts when they can feel the winds changing direction for their employer?

They may not be using specific information, but they ought to still have a good 'feel' for the company's prospects in the coming months.

There are actually a number of stock market price prediction services that specifically follow the trades of company Directors and major shareholders when they are announced to the market. Why? They recognise that when Directors buy or sell, the market price of the company in question will often follow (positively or negatively) afterwards.

This article makes the point well that a company Director ought to be a good guide, especially if they are dealing in relatively large volumes. It ought to be added though, that when lots of people follow these trends and buy and sell, it can and often will impact the market, thus making the prediction true. Whether this is a secret or simply an advantage is up to the reader to decide.

However, anyone that has been inside a dealing room for an investment bank will recognise the massive difference between available information that a professional has and those that a private investor has. A Bloomberg terminal, a Reuters terminal, three extra screens of information and very astute colleagues everywhere makes for quite an informational advantage. This equipment is not cheap, quite the contrary, but when dealing in millions, tens or hundreds of millions every day, it would seem a little churlish to scrimp and save on the hardware!

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