F9 Stock market efficiency

If a stock market is efficient, share price should vary in a rational way and will reflect the amount of relevant information that is available. The efficient market hypothesis identifies three forms of efficiency, named weak, semi-strong and strong.

Weak form efficiency

Under the weak form hypothesis of market efficiency, share prices reflect all available information about past changes in the share price. Since new information arrives unexpectedly, changes in share prices should occur in a random fashion. If it is correct, then using technical analysis to study past share price movements will not give anyone an advantage, because the information they use to predict share prices is already reflected in the share price.

Semi-strong form efficiency

If a stock market displays semi-strong efficiency, current share prices reflect all relevant information about past price movements and their implications and all knowledge which is available publicly. It means that individuals cannot ‘beat the market’ by reading the newspapers or annual reports, since the information contained in these will be reflected in the share price.

Strong form efficiency

If a stock market displays a strong form of efficiency, share price reflects all information whether publicly available or not, including from past price changes, form public knowledge or anticipation and form specialists’ or experts’ insider knowledge.