When an investor puts their money in the stock market, the overall goal is to receive the highest returns possible. Some investors even take this a step further and put together investment strategies around trying to outperform the market. However, outperforming the market is difficult for even the most knowledgeable investor due to market efficiency. With market efficiency, the price and any relevant information about a particular stock are made public, so no investor has an advantage over the other. Of course, some people may have insider information to some degree, but financial experts believe market efficiency takes precedence and does not give those investors an advantage either.
Unpredictability Leads To Market Efficiency
The primary way an investor gains an advantage over any other investor can come down to how they receive and interpret information. But due to market efficiency, the information is available to every investor, whether it’s financial news, social events, politics, economic news, and even how the media portrays certain events to an extent. As unpredictable as these events are, the idea with market efficiency is every investor is exposed to this unpredictability and can put together investment strategies based on their interpretation of events and news and the financial knowledge they gain from them. Planning the perfect investment strategies is difficult because of market efficiency and the randomness it entails.
How Market Efficiency Is Created
How market efficiency is created in any given market is interesting. The more investors believe the market is possible to beat and put together investment strategies to beat it, the stronger the market efficiency they are creating. So in a way, it’s the investors who don’t necessarily believe in market efficiency who provide the fuel for a more efficient market. Other market efficiency factors include widely-available and accessible information regarding cost information, and the market must be somewhat large and very liquid. In general, complete market efficiency is difficult to achieve since most markets are partly inefficient.
Global Markets Are Gaining More Efficiency
Markets worldwide are more efficient than ever, primarily due to information technology. People on the other side of the world can keep up with news and events in other countries as it happens, and even place electronic trades immediately upon receiving the news. Because of this factor, prices often move up or down very quickly when news breaks since investors’ actions happen worldwide rapidly. The problem with information technology is it could eventually make markets less efficient because of the need to verify the information before it impacts the market. With news and media outlets rushing to be the first to break a story, it can sometimes be challenging to know whether the news is valid or not right away.
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