What Is Market Efficiency?
When money is put into the stock market, it is done to generate a return on the capital invested. Many investors try not only to make a profitable return but also to outperform or beat the market.
Efficient market hypothesis at any given time, prices fully reflect all available information on a market. Thus, no investor has a benefit in predicting a return on a stock price since no one has access to information not already available to everyone else. In an efficient market buying and selling securities in an attempt to outperform the market will effectively be a game of chance rather than skill.
According to Fama, Efficient market is a market which adjusts rapidly to new information. It is a market in which prices fully reflect available information. (Fama, 1969)
If the market is efficient, news about the stock should be reflected immediately in the price.
The EMH is associated with the idea of a "random walk," which implies that the next move of the speculative price is independent of all past moves or events, so historic prices are of no value in predict future prices.
Random Walk Theory
Random walk occurs when there is no correlation between one movement and subsequent ones. For example in case of price of shares ?one day's price change cannot be predicted by looking at previous day's price change because the present price movements are independent of successive movements.
A Random walk occurs because the share price at any one time reflects all available information and it will only change if new information arises.
How Does a Market Become Efficient?
In order for a market to become efficient, investors must recognize that a market is inefficient and possible to beat. A market ...