The Ingredients of Efficiency
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The Ingredients of Efficiency
The degree to which information on securities is available determines a market’s efficiency. According to the efficient market theory, what investors are actually trading is information. This information comes from a variety of sources. There is the public information that comes from a security’s history, such as old prices or trading volumes. There is non-public information that must be obtained through deeper research, such as company information. Finally, there is information known only to insiders.
Things To Know
- The faster a security’s information is translated into its price, the more efficient the market.
Speed and efficiency
The faster a security’s information is translated into its price, the more efficient the market. With the rise of computers and the Internet, security information is discovered and incorporated more quickly than ever before, creating even higher levels of market efficiency.
In order for a market to be efficient, investors must act rationally, transaction costs must be minimal, and the market must be able to gain new information as quickly as possible.