Market Efficiency

What is Market Efficiency?


Stock prices change in response to information, which could broadly be specific to a country, sector or company. Market efficiency is about how efficiently this information is priced into a stock price.


If a stock market is efficient, then all relevant information has already been priced in. This makes it difficult to achieve an abnormally high return as there are no stocks that are under or over-valued.


If a stock market is not efficient at all, then it would mean that information does not drive stock prices at all. This essentially means that stock prices move completely randomly and cannot be predicted.


There are three types of market efficiency: weak form, strong form and semi-strong form. Even though it is hard to measure, it is thought that most developed stock markets are semi-strong efficient.

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