What Is an Effecient Market

What is An Efficient Market?

When we talk about an efficient market we are not talking about competent grocery stores. What we mean when we say an "efficient market" is that stock market prices fully reflect current information in the market, or information that is "efficient". We call this EMH (Efficient Market Hypothesis). The general desired outcome of trading stocks is to make a profit, however investors will often times try to "beat the market" which means to earn over the market average by having information that other investors don't . The purpose of an efficient market is to narrow the playing field.

There are three levels of EMH. They are weak, semi strong, and strong. These levels basically refer to the amount of information currently available. "The weak form EMH stipulates that current asset prices already reflect past price and volume information. The information contained in the past sequence of prices of a security is fully reflected in the current market price of that security. It is named weak form because the security prices are the most publicly and easily accessible pieces of information. It implies that no one should be able to outperform the market using something that "everybody else knows". Yet, there are still numbers of financial researchers who are studying the past stock price series and trading volume data in attempt to generate profit. This technique is so called technical analysis that is asserted by EMH as useless for predicting future price changes. The semi strong form EMH states that all publicly available information is similarly already incorporated into asset prices. In another word, all publicly available information is fully reflected in a security's current market price. The public information stated not only past prices but also data reported in a company's financial statements, company's announcement, economic factors and others. It also implies that no one should be able to outperform the market using something that "everybody else knows". This indicates that a company's financial statements are of no help in forecasting future price movements and securing high investment returns. The strong form EMH stipulates that private information or insider information too, is quickly incorporated by market prices and therefore cannot be used to reap abnormal trading profits. Thus, all information, whether public or private, is fully reflected in a security's current market price. That means, even the company's management (insider) are not able to make gains from inside information they hold. They are not able to take the advantages to profit from information such as take over decision which has been made ten minutes ago. The rationale behind to support is that the market anticipates in an unbiased manner, future development and therefore information has been incorporated