What is An Efficient Capital Market?
An efficient capital market is a market that reflects all available news and information. An efficient market is also quick to absorb new information and adjust stock prices relative to that information. This is known as an informationally efficient market. Generally, efficient markets are expected to reflect all available information. If that is not the case, investors with the information may benefit leading to abnormal returns.
The following are the main assumptions for a market to be efficient:
- A large number of investors analyze and value securities for profit.
- New information comes to the market independent from other news and in a random fashion.
- Stock prices adjust quickly to new information.
- Stock prices should reflect all available information.
Weak, Semi-Strong and Strong EMH
InvestingMarket efficiency theory states that a stock’s price will fully reflect all available and relevant information at any given time.
InvestingAn investment theory that states it is impossible to "beat the market".
InvestingLearn about the upside of picking stocks nobody follows. The less followed a stock, the more opportunity there is for a stock being incorrectly priced.
InvestingThere are many types of efficiency ratios, but all measure how well a company utilizes its resources to make a profit. Business managers use these ratios to determine how well they are operating ...
InvestingModern portfolio theory and behavioral finance represent differing schools of thought that attempt to explain investor behavior. Perhaps the easiest way to think about their arguments and positions ...
InvestingPareto efficiency is an economic state where resources are allocated in the most efficient manner.
InvestingFind out how a cat and a ladybug prove markets are both random and efficient.
InvestingProduction efficiency is the point at which an economy cannot increase output of a good or service without lowering the production of another product.
InvestingDirect paths to wealth are getting narrower, fewer and may be locked up tight.