Efficient Market Theory

• Efficient markets are those markets where share prices have an independent path and are independent of previous prices. 
• Demand and supply influences stock prices in an independent efficient market. 
• An efficient market is one in which the market price of a security is an estimate of the intrinsic value. 

Factors on which market efficiency depends:

1. Free flow of ideas and information
2. Perfect knowledge of investors about all the market information
3. No single investor has any influence on the market
4. Presence of a large number of investors
5. Equilibrium of demand and supply
6. Price changes only in response to new market information

Three conditions that will result into market efficiency:

1. Rational investor
   • A rational investor will result in the stock prices adjusting rationally to the flow of new information.
   • Any change in the company’s policy or any major move by the company will make the investor react which in turn will be reflected in the stock prices.
2. Independent deviations
3. Effective arbitrage