Market Efficiency

Loading the player...

What is 'Market Efficiency'

Market efficiency is the degree to which stock prices reflect all available, relevant information. Market efficiency was developed in 1970 by Economist Eugene Fama who's theory efficient market hypothesis (EMH), stated that it is not possible for an investor to outperform the market because all available information is already built into all stock prices. Investors who agree with this statement tend to buy index funds that track overall market performance.

BREAKING DOWN 'Market Efficiency'

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. 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.

RELATED TERMS
  1. Price Efficiency

    The premise that asset prices are efficient, to the extent that ...
  2. Efficient Market Hypothesis - EMH

    An investment theory that states it is impossible to "beat the ...
  3. Weak Form Efficiency

    One of the different degrees of efficient market hypothesis (EMH) ...
  4. Semi-Strong Form Efficiency

    A class of EMH (Efficient Market Hypothesis) that implies all ...
  5. Discounting Mechanism

    The premise that the stock market essentially discounts, or takes ...
  6. Strong Form Efficiency

    The strongest version of market efficiency. It states all information ...
Related Articles
  1. Active Trading

    What Is Market Efficiency?

    The efficient market hypothesis (EMH) suggests that stock prices fully reflect all available information in the market. Is this possible?
  2. Options & Futures

    Financial Concepts: Efficient Market Hypothesis

    Efficient market hypothesis (EMH) is an idea partly developed in the 1960s by Eugene Fama. It states that it is impossible to beat the market because prices already incorporate and reflect all ...
  3. Active Trading Fundamentals

    Efficient Market Hypothesis: Is The Stock Market Efficient?

    Deciding whether it's possible to attain above-average returns requires an understanding of EMH.
  4. Mutual Funds & ETFs

    Efficient Market Hypothesis (EMH)

    Efficient Market Hypothesis (EMH)
  5. Professionals

    Capital Market Efficiency

    We look at the efficient market hypothesis and see if it holds up.
  6. Active Trading

    Market Efficiency Basics

    Market efficiency theory states that a stock’s price will fully reflect all available and relevant information at any given time.
  7. Professionals

    The Efficient Market Hypothesis

    CFA Level 1 - The Efficient Market Hypothesis. Learn the basics of the efficient market hypothesis. Includes the assumptions and expectations behind this theory on capital markets.
  8. Professionals

    Weak, Semi-Strong and Strong EMH

    CFA Level 1 - Weak, Semi-Strong and Strong EMH. Learn the aspects of the three forms of the efficient market hypothesis. Includes assumptions and testing methods of each form.
  9. Professionals

    Efficient Market Hypothesis (EMH)

    Efficient Market Hypothesis (EMH)
  10. Professionals

    Implications of Efficient Markets

    CFA Level 1 - Implications of Efficient Markets. Learn how the efficient market hypothesis impacts technical analysis, portfolio management and index funds.
RELATED FAQS
  1. What does the efficient market hypothesis assume about fair value?

    Found out what the efficient market hypothesis says about the fair value of securities, and learn why technical and fundamental ... Read Answer >>
  2. What are the primary assumptions of Efficient Market Hypothesis?

    Find out about the key assumptions behind the efficient market hypothesis (EMH), its implications for investing and whether ... Read Answer >>
  3. What does the Efficient Market Hypothesis have to say about fundamental analysis?

    Find out what the efficient markets hypothesis has to say about fundamental analysis and how recent finance research has ... Read Answer >>
  4. What are the differences between weak, strong and semi-strong versions of the Efficient ...

    Discover how the efficient market theory is broken down into three versions, the hallmarks of each and the anomalies that ... Read Answer >>
  5. Why does the efficient market hypothesis state that technical analysis is bunk?

    Learn about why there are strong conceptual differences between the efficient market hypothesis and technical analysis about ... Read Answer >>
  6. Can the Efficient Market Hypothesis explain economic bubbles?

    Learn about the nuanced relationship between the efficient market hypothesis and economic bubbles and the requirements and ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center