Inefficient Market

  

Categories: Trading

In an absolutely efficient market, the price of an item will exactly reflect the true value of an item. If oil cost $65 a barrel to suck out of the ground, package, and ship, then it is definitely worth $65 a barrel. And that's what it'll sell for.

An inefficient market represents the opposite: a market where price doesn’t indicate true value. On the far end of inefficiency, prices would approach near randomness. Think: market bubbles...very inefficient markets. Involving tulips that cost more than a house, or situations where you plan to retire on your collection of first-run, still-in-original-package Star Wars toys.

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Finance: What is market risk?5 Views

00:00

Finance Allah shmoop what is market risk All right There

00:08

are a lot of risks when you invest money Two

00:10

of the most common categories are unsystematic risk And yes

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of course systematic risk Also known as market risk Well

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unsystematic risk refers to risks linked to a specific stock

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or security So you buy shares in your dad's publicly

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traded ice cream company and the company goes bankrupt Who

00:27

knew pork rind ice cream would prove so unpopular Who

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knew well that's unsystematic risk You made a bad investment

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and you paid for it by losing everything you invested

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un systematically Well that's individual stock risk or in systematic

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risk AII bad brain bad return What not all investments

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do well In fact many of them do poorly even

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for the best of investors So most professionals diversify their

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eggs such that not all of them are invested in

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one stock or one basket So that revolves around unsystematic

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risk That is risk You can actually do something about

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and improve your odds of being successful like by being

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a good smart investor But then there's market risk which

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just exists as a natural part of the risk world

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For illustrative purposes You could choose to not take any

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road risk Like when you drive on the roads Your

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odds of being hit by some idiot texting his girlfriend

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and not looking at the double yellow line are not

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one in a good Gillian right You also have a

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risk of a tire blowout or a tree falling on

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you or skidding into a mailbox on that hill with

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the gravel in the oil slick from the construction people

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right Those are all quote market risks unquote of driving

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So why do it Why drive Why not just stay

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home Never leave the house get Amazon and door dash

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and ups to take care of all of your needs

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and never suffer the market risk of dying on the

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road Well for some people this probably is a good

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idea Well the same allegory lives in the stock market

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When you invest in stocks odds are extremely high that

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at some period while their value will go down maybe

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a lot You can't head yourself against things like terrorist

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attacks and natural disasters political upheaval and zombie apocalypses or

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apocalypse side They say The zombie There's no real way

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to protect yourself against market risk It's just systematic It's

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part of the system Got it So there's no way

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to deal with market risk other than for one thing

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time Historically the stock market goes up over time Check

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out this glorious chart running for one hundred years in

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change for what the market is done without even calculating

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the additional return from dividends distributed along the way Well

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you can see that there has rarely been an extended

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period of time when the market didn't go up and

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or at least distribute enough in dividends Such that in

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each decade while there's been a nicely positive return from

02:42

being invested in the stock market could this suddenly change

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and go the other direction such that we have half

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a century of no growth Sure but that would be

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a big departure from the way our driving has gone

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in the past on the roads But you never know

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There's always the N plus one idiot out there texting

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and driving and you know really not giving a

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