Market efficiency - Financial definition
Concise definition of the term market efficiency
Market efficiency in finance refers to the degree to which asset prices reflect all available information, ensuring that securities are fairly priced at any given time.
Comprehensive definition of the term market efficiency
Market efficiency, a cornerstone concept in financial economics, posits that financial markets quickly and accurately incorporate all relevant information into asset prices, leaving little room for arbitrage opportunities. In an efficient market, stocks and other securities are always priced at their true value, making it impossible to consistently achieve higher returns without taking on additional risk. This principle underlies the Efficient Market Hypothesis (EMH), which has implications for investment strategies and regulatory policies.
Practical examples include the rapid adjustment of stock prices to news announcements, such as earnings reports or macroeconomic data releases. Market efficiency also influences practices like passive investing, where investors buy index funds that mirror market performance, assuming that active management cannot consistently outperform the market.