Efficient Market Hypothesis is the idea that the competition among investors works to eliminate all exploitative opportunities in the market. It implies that securities will be fairly priced, given all information that is available to investors.
Real markets fall on a scale between strong form and weak form, as shown above. However, it is useful to know the characteristics of each form of efficiency of the market.
Strong-form market efficiency: This implies that all information is available to the public in news reports, financial statements, corporate press releases, or other public data sources. In this situation the market will react instantaneously to any news. This implies that technical analysis will be far more accurate and given an appropriate methodology, successful.
Weak-form market efficiency: A weak for market efficiency, implies that the price of the share doesn't reflect the actual value at all. Only a small or no information that would be pertinent to an investors decision to buy or sell has been disseminated to the public. In this situation, technical analysis will not work, the price of the asset will not move with the information, making it redundant.
Semi-Strong market efficiency: A semi-strong market efficiency is one where some of the information needed to make an informed decision has reached the investor. Within the scale this is where most stock markets would be classified. The share price would reflect most of the important information about the company. Things to consider that would keep a market in this range may not just be the dissemination of information but also the difficulty in interpretation the information. Information on new technology or complicated legal or financial may require a specific analyst to interpret.
With the rise of the internet and regulatory consequences for not disclosing important information, most markets are moving towards strong-from market efficiency. Resulting in the Efficient Market Hypothesis becoming more adapt in describing our market situation.
