A market is said to be efficient if the price of the securities making up the market reflects all available information at any given time. It is therefore impossible to predict the price since all the information available is already present in the current price.
An efficient market exists on condition that :
Funds are allocated to the most productive activities, thus contributing fully to economic development.
Stock prices reflect the best available information and offer the best possible signals.
Offerers and seekers can meet at any time at low cost.
Indeed, there are far too many Noise Traders (about 90 or 95%). Arbitrage therefore becomes risky since despite rational investors, the Noise Traders have more strength and can continue to cause either the undervaluation of a stock or its overvaluation, despite arbitrage. If the risk is not worth it, then the arbitrage is not carried out.
Some investors are naive and do not realise that all information is carried by the price. Thus, when a naive investor sees a newspaper talking about a stock in a positive light, he will buy that stock, believing that it will rise. However, a well-informed investor will rather take a short position because he knows that all the information is already taken into account by the price.
Status:: #wiki/notes/mature
Plantations:: Finance
References:: L'art du trading