Question

Describe Market efficiency

Answer 1

Market efficiency is the extent to which the price of a stock reflects all the available and relevant information with regards to the stock. If the market is efficient then all the information is already captured in the share price which means that all shares are priced at their true value or very close to the true value. There will not be any undervalued or overvalued shares. On the other hand, if markets cannot capture all the available information about a stock then there is an opportunity to make profits since not all share prices will not reflect their intrinsic value.

Market efficiency has three basic forms: 1). weak form - in which prices reflect the market data including past prices and trading volumes. 2). semi-strong form - prices reflect all public information available about the stock 3). strong form - prices fully capture all information about a stock, including public and private information.