Efficient market

Efficient market

Market in which prices correctly reflect all relevant information.

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efficient market

A market in which security prices reflect all available information and adjust instantly to any new information. If the security markets are truly efficient, it is not possible for an investor consistently to outperform stock market averages such as the S&P 500 except by acquiring more risky securities. Significant evidence supports the premise that security markets are very efficient. Also called market efficiency. See also random-walk hypothesis, strong form, weak form.

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Efficient market. When the information that investors need to make investment decisions is widely available, thoroughly analyzed, and regularly used, the result is an efficient market.

This is the case with securities traded on the major US stock markets. That means the price of a security is a clear indication of its value at the time it is traded.

Conversely, an inefficient market is one in which there is limited information available for making rational investment decisions and limited trading volume.