Market Efficiency

Market Efficiency

Market efficiency concerns the extent to which market prices incorporate available information. Investors and academics have a wide range of viewpoints on how efficient the market actually is, as reflected in the strong, semi-strong and weak versions of the EMH. At the other end of the spectrum from Fama and his followers are the value investors, who believe that stocks can become undervalued, or priced below what they are actually worth. In efficient markets, prices become not predictable but random, so no investment pattern can be discerned. Successful value investors make their money by purchasing stocks when they are undervalued and selling them when their price rises to meet or exceed their intrinsic worth.

Since investors have the opportunity to invest in more than one market, it is important to have a fair understanding of the criteria on which markets can be compared. So, Efficient Market means, the market in which prices correctly reflect all relevant information.

“The efficient-market hypothesis (EMH) asserts that financial markets are ‘informationally efficient’. In consequence of this, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.”

A theory, which moves beyond the definition of the efficient market hypothesis, that states that new information about any given firm is known with certainty, and is immediately priced into that company’s stock.