In the real world, many a times there are regulatory distortions on the trading activity of the stocks such as restrictions on short-selling or on the foreign ownership of a stock etc. causing inefficiencies in the fair price discovery mechanism.
Such restrictions hinder the process of fair price discovery in the markets and thus represent deviation from the fair value of the stock. Then there may be some restrictions on the price movement itself (such as price bands and circuit filters which prevent prices of stocks moving more than a certain percentage during the day) that may prevent or delay the efficient price discovery mechanism.
Also, many institutional investors and strategic investors hold stocks despite deviation from the fair value due to lack of trading interest in the stock in the short term and that may cause some inefficiencies in the price discovery mechanism of the market. You can read more about efficient market hypothesis here which will further amplify on the subject.
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Such restrictions hinder the process of fair price discovery in the markets and thus represent deviation from the fair value of the stock. Then there may be some restrictions on the price movement itself (such as price bands and circuit filters which prevent prices of stocks moving more than a certain percentage during the day) that may prevent or delay the efficient price discovery mechanism.
Also, many institutional investors and strategic investors hold stocks despite deviation from the fair value due to lack of trading interest in the stock in the short term and that may cause some inefficiencies in the price discovery mechanism of the market. You can read more about efficient market hypothesis here which will further amplify on the subject.
Subscribe for our free stock trading tips and make money like professionals.
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