Are markets efficient?

Are markets efficient?

If you recall one of the golden rules of investing, it states that all publicly known information regarding a stock is already in the price. Market efficiency builds on this topic. Efficiency (in stock market terms) refers to the fact that prices reflect information that is known and reflects information quickly. The price should reflect the information but the speed at which prices react to information are equally important. The speed at which the markets reacts is also important as this gives investors a greater idea of what's happening.

 

How is all of this information built in?

Trades. Trades. Trades. With market efficiency, trades are the name of the game. Information is reflected by the nature of trades and the type.

Are North American markets efficient?

For the most part, many people argue that our markets are very efficient. The founder of the theory of market efficiency - Eugene Fama actually argued that since markets are very efficiency there is no way that retail investors can actually beat the market as all the information is actually built into the stock already.

 The two extremes of market efficiency. 

The two extremes of market efficiency. 

Why do people say to be wary of “emerging markets”

 

The reason why people are wary of emerging is due to the different regulations and properties of foreign markets. Many of the world’s developed markets have similar regulations and rules that help promote fair trading. In some countries where stock exchanges are less popular or have more stringent requirements - market efficiency can be skewed.

Some of the key things affecting market efficiency are: the number of traders, rules on trading and information disclosures.

One of the reasons why skewed efficiency is a problem in developed exchanges is simply due to the lack of traders. With less traders, it also takes longer for stocks to reflect changes in their prices as less people are trading on that stock.

One of the main arguments on efficiency is also the argument that insider trading is still prevalent. This happens when people trade on material nonpublic information. An easy example is if a company insider purchases a large chunk of shares before an acquisition is announced.

I will leave it up to you guys to use your own judgement and decide if our markets are efficient. Let me know your thoughts in the comments!

 

 

Disclaimer: All of the above information is my own personal opinion. Please do your research and consult with a licensed representative before making any investment decision. Examples shown are for education purposes only.

Thumbnail Image: Quora. 

 

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