- 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:
- Free flow of ideas and information
- Perfect knowledge of investors about all the market information
- No single investor has any influence on the market
- Presence of a large number of investors
- Equilibrium of demand and supply
- Price changes only in response to new market information
Three conditions that will result into market efficiency:
- 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.
- Independent deviations
- Effective arbitrage
April 15, 2022