Market efficiency refers to the degree to which stock prices reflect all available information about a

company's financial performance, competitive environment, and other relevant factors. There are three
types of market efficiency: weak form efficiency, semi-strong form efficiency, and strong form efficiency.

Weak form efficiency: In this type, the current stock prices reflect all past market data, including
historical prices and volume traded. This means that it is not possible to profit by studying past prices.

Semi-strong form efficiency: In this type, current stock prices reflect all publicly available information,
including news releases, financial reports, and analyst reports. This means that it is not possible to profit
by analyzing public information.

Strong form efficiency: In this type, current stock prices reflect all available information, including
private or insider information. This means that it is not possible to profit by using insider information.

The principles of market efficiency are as follows:

Efficient market hypothesis (EMH): This principle is based on the idea that markets are efficient,
meaning that security prices rapidly and accurately reflect all available information.

Random walk theory: This principle suggests that stock prices move in an unpredictable and random
manner, making it difficult to predict future price movements.

Transparency: This principle is based on the idea that market information should be widely available to
all market participants.

Full disclosure: This principle requires companies to provide complete and accurate information to the
public, including financial statements, earnings reports, and other relevant information that may impact
the value of their securities.

Fairness: This principle ensures that all market participants have equal access to market information and
that pricing is based on fundamental factors rather than insider information or manipulation.

Advantages of market efficiency:

Accurate pricing: Efficient markets ensure that prices accurately reflect the individual and collective
knowledge of all participants, which leads to accurate pricing of securities.

Transparency: Efficient markets are characterized by transparency, which ensures that market
information is widely available to all, providing equal access to all market participants.
Fairness: Efficient markets operate on the principle of fairness, which means that all market participants
have equal opportunities to transact on an equal footing.

Lower transaction costs: Efficient markets reduce the transaction costs associated with trading as prices
better reflect the underlying value of securities and reduce the need for extensive research.

Disadvantages of market efficiency:

Reduced information asymmetry: The reduced information asymmetry that comes with efficient
markets means that investors cannot earn significant abnormal returns through superior information.

Reduced market returns: In efficient markets, overall returns are lower, as prices already reflect all
available information, meaning that undervalued, or overvalued, securities are less likely to be available.

Risk-Adjusted Returns: Efficient markets mean that there is less opportunity to earn higher returns, and
that investors must accept higher risk to outperform the market.

Speculation: Efficient markets can lead to speculation, as investors can't gain information, or are
skeptical of fundamental investments in markets where prices already reflect everything.

Overall, market efficiency is an important concept that determines the accuracy of market prices and
affects the behavior of investors and corporations. Despite its criticisms, it remains a central concept in
financial economics and continues to shape investment decisions.