Efficient Market: Term Definition
A market can be described as efficient when the prices of securities being traded in the market reflect all available information at a given time. The information reflected in the market must be relevant to the security in question meaning that all information that comes to the market will be incorporated quickly and rationally. An efficient market is not a perfect market per se; however, it has many features of a perfect market. In normal circumstances, prices of various securities are determined by the forces of supply and demand and this gives rise to the efficiency of the market.
If suppliers get bad information relating to certain security, they will sell the shares in large numbers and there will few buyers thereby the equilibrium price of the security will go down because the supply will be in large quantities while the demand is low. On the other hand, if the market gets good information the price of the security will go high because holders will stay put with their securities and the few being traded in the market will be sold at a higher price which will be the equilibrium price.
There are forms of market efficiencies. These forms include weak form, semi-strong form, and strong form. The week form is where the current market price of security contains all the information that has been filtered in the market. The investors will have no need of forecasting the future trends of the shares prices since the trend can be determined by the past historical data of prices and price changes.
The second form of market efficiency is a semi-strong form where all market prices reflect all relevant public information. It means that the efforts of investors trying to analyze all public-held information will be futile since returns for the efforts will not be worth it. The last form of this market is a strong form where the prices of security reflect all the information publicly held and that information available to privileged individuals in the society which means that the current market prices can be used to determine the future changes in prices. No investor will gain by struggling to get any form of information from this form.