Market efficiency refers to the ability possessed by markets to include information
that offers the maximum possible opportunities for traders to buy and sell securities
without incurring additional transaction costs. An efficient market is a place where
the market prices of financial instruments like stocks reflect all available information.
Stock market efficiency is all about getting stock prices equal to what they are
actually worth. Markets are inefficient when they don’t get the value of things right,
which results in black markets. Therefore, nobody can beat the market, because
there are no overvalued or undervalued securities
The Efficient Market Hypothesis (EMH), alternatively referred to as the Efficient
Market Theory is a hypothesis where share prices reflect all information and that
consistent alpha production is impossible. Therefore, assuming this is true; no
amount of analysis can give an investor an edge over other investors, collectively
known as market quote. There are 3 types of market efficiency: weak, semi-strong, and strong. Together they constitute the elements of the Efficient Market Hypothesis (EMH).
● The weak form of Market Efficiency
In a weak-form efficient market hypothesis, security prices tend to fully reflect all past market data including all historical prices and trading volume information. In simple terms, in a weak-form efficient market, the past trading data or the past news
information has already been accounted for in the current prices and
investors cannot predict the future price changes by studying patterns of past
prices or others. The implication here is that investors and traders cannot earn
excess returns using technical analysis.
● The semi-strong form of Market Efficiency
Another capital market hypothesis is a semi-strong form of efficiency, where the current price of securities is fully affected by all past information and all publicly available
information. As soon as new information is launched to the public, it is
consumed directly. According to this form of market efficiency, neither
fundamental nor technical analysis is efficient enough to bring superior
returns, because even the fundamental data is already available to everyone
and therefore, incorporated in the asset’s price.
● The strong form of Market Efficiency
The strong form of market efficiency states that the stock prices incorporate all the information available about the stock including public and private information. Here public information is available through news briefings published in a journal, research paper, market update, or any other. And privately information is inside information that can come from the insiders of the organization. The implication is that no analysis
will consistently generate excess returns. This form is very unreal and it is
most likely theoretical.
