What is market efficiency?

A term in finance of utmost importance is that of market efficiency. A market is said to be efficient when the prices of the securities or financial assets that are traded in that market reflect all the existing information that there is, and fully and quickly adjust to the new data that appears.

In this sense, the securities that are presented valued efficiently will yield benefits on their investment appropriate to the level of risk that is being assumed. There are no undervalued or overvalued securities, since the efficiency of the market implies that the intrinsic value of the asset conforms to reality. Therefore, nobody wins more or less because a title is badly valued, but because of the cleverness of knowing how to sell the title when it comes best.

As a consequence, this hypothesis gives us a glimpse of what we have previously mentioned: being able to exceed the results obtained with the asset in the market is almost impossible. For this to happen, we must know extra information in order to make a rational decision (or try our luck, just in case). The news or information that is known would allow us to make a decision without playing with chance, and getting closer to the idea of โ€‹โ€‹market efficiency (a fundamental piece of efficient markets).

The prediction of what will happen to the values โ€‹โ€‹of the financial assets o Titles plays an important role in decision making. If this is taken at random and has effective consequences, there will be no problems in the results obtained by said decisions as opposed to those made or obtained by the market.

Market irrationality is very common when there is some instability in the results obtained, causing certain imbalances in financial markets such as depressions, bubbles, etc.

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