Market Efficiency

Efficiency is defined as:

• How quickly is new information considered for determining the price of things.

Degrees of Efficiency

Efficiency is a spectrum, meaning you can increase and decrease it by very small amounts.
Here, I'm going to explain three points in this spectrum:

• Weak efficiency: Current prices don't take into account new information beyond past prices.
• Intermediate efficiency: Current prices are based on all publicly available information.
• Strong Efficiency: Current prices are based on all information, even insider knowledge

Reality

In the real world, most Markets operate and very high efficiency. But they're still not perfectly productive.

What factors impact real markets?

Efficiency Boosters

Instant information

With the internet becoming more and more available to the world, knowledge travels a lot quicker than it used to.

Low trading fees

The more people can participate in the markets, the more opinions and thoughts are incorporated into the price.

Algorithmic Trading

Programs that trade on behalf of their owners can react to news or changes in price in a fraction of a second.

Efficiency Inhibitors

Strict Regulations

Laws that restrain what is and isn't possible to do in the Financial Markets lower efficiency, with the purpose of decreasing inequality.

Misinformation

Incorrect assertions can lead to investors having wrong information, which will be taken into account, even if it shouldn't be.

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Note

I'm not judging any of these factors as good or bad, high efficiency is not necessarily positive OR negative. It has both pros and cons.
Please make an informed opinion, based on what I presented to you!

Conclusion

Modern markets are already pretty efficient and, in the future, will probably get more and more!

In the next post, we're going to take a look at the consequences of this pretty high efficiency!

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Thanks for reading!
Remember to Upvote and Share, so that I can keep making many posts per week!

Take a look at my last posts, about Investments!

• How Inflation can wipe out your savings, debt, and Bond investments - At the same time!
• Portefolio Diversification - Why it's so important and how it works!

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