Stock Market Investment: Key Economic Indicators and Efficient Market Hypothesis

STOCK MARKET
INVESTMENT

Table of Contents
INTRODUCTION...........................................................................................................................3
Question 1: Six Key Economic Indicators...................................................................................3
Question 2: Discussion of Efficient Market Hypothesis and its importance for finance manager
......................................................................................................................................................5
CONCLUSION................................................................................................................................9
REFERENCES................................................................................................................................1

INTRODUCTION
Stock market refers to the platform where issuance, buying and selling of shares of the
publicly held companies took place with the help of formalized stock exchanges. Investment
made in stock market is considered as a highly risky proposal where information pertaining to
company and its share price history and trends are necessarily required to be obtained and
studied before making investment. This is done to ensure high profitability and less risky
element in the proposed stock market investment. In this report, the discussion pertaining to the
concepts associated with stock market investment will be done which involves key economic
indicators and their interaction with each and the second one is Efficient Market Hypothesis.
Further, the significance of EMH theory for the finance manager in relation to investment and
strategies pertaining to portfolio management will be stated in this report.
Question 1: Six Key Economic Indicators
The six key economic indicators that have to be consider while analysing the overall health
of the economy involves Gross Domestic Product or GDP, Employment, Inflation, Interest rates,
Budget Deficit and sentiments which have been discussed in detail in the following section of
this report.
Gross domestic Product or GDP: This indicator of the economy is useful in measuring the value
of total goods and services produced or consumed within an economy. If the GDP of an
economy is increasing at a rapid rate, this indicates ample opportunities available for businesses
operating within an economy to enhance their sales (Saidani and et.al., 2019). Through GDP, the
measurement of economy's output derived from industrial production is possible which is
considered to be another indicator of economic growth that is deemed to be narrowly focusing on
economy's manufacturing aspect. GDP has significant relationship with level of employment
existing within an economy where it is generally understood that the rate of employment is
proportional to the growth taking place in GDP. When GDP grows, there is a growth in
productivity of firms within an economy which tends to increase the demand for workers and
thus the rate of employment rises accordingly. Also, GDP could grow only if there were creation
of jobs and income within the economy.
Employment: The unemployment rate indicates the number of unemployed people as a
percentage of labour force. Total labour force involves both who are either actively seeking

employment or currently employed. With the help of unemployment rate, it could be easily
measured or determined that to what extent the economy is operating at full employment. The
Job growth is one of the most significant indicators that helps in determining whether the health
of an economy is poor or better (Merino-Saum and et.al., 2018). The low unemployment rate
means the employment rate of that country is high which further indicate that business expansion
opportunity of that country is also high. It is because to expand any business in other area of
country or world the business requires labour force and to operate its business the company need
to hire huge workforce. This means the job opportunities will increase that ultimately leads to
reduction in the unemployment of business. Thus, it can be said that the business expansion
indicator has a positive interaction or effect on the unemployment rate economic indicator
(Moraga and et.al., 2019). In general context, it is understood that when the unemployment rate
of a country decreases than the economic growth of same country will increases. Unemployment
is generally studied with respect to workers but actually it is not restricted to workers and can be
used as a measure to get useful insights for the economic strength in terms of unemployment rate
of other factors of production as well. For instance, capacity utilization rate can be determined by
obtaining the ratio of actual output with potential output.
On the other hand, the unemployment rate is also interacted with the other indicators such
as consumer spendings. It is because when the unemployment rate of country is low in that case
the consumer spendings will be high. It is because the people of that country are earning enough
to spend on the consumption of products and services provided by the organization. Also, the
low unemployment rate of the country encourages the business to provide the fair wages and
incentives to employees in order to retain and attract the talents. Thus, the unemployment rate,
business expansion and consumer spendings interacted with each other.
Inflation: It indicates the rise in the general price level within the economy. When the rate of
inflation is high, it indicates the demand for goods and services is very much high against the
productive capacity of the economy causing pressure over price to move upward. Government
always wishes to operate at full employment but never encourages inflationary pressures.
Accordingly, trade off between unemployment and inflation is considered to be the heart of
disputes arising on the ground of macroeconomic policy. When inflation rises, there were more
demand for goods and services in the short run because people believed that there would be