If financial markets are truly efficient, they reflect the up-to-the second composite judgment of millions of participants—in an environment characterized by many competing investors, each with similar objectives and each with equal access to the same material facts. In this context, “efficient” markets quickly digest new data on an economy, an industry, or the value of an enterprise and embed this data almost instantly into security prices. This means that news is embedded in prices so quickly that it becomes useless; there is no differential advantage or disadvantage to trading with or without news; and prices are always fair and reflect all that is known at the instant of a trade.
An efficient market is one in which many participants, each with similar investment objectives and each with equal access to the same material facts, actively compete. Global financial markets bring together millions of profit-motivated professional and private investors who continually search for attractive investment opportunities. Investors in these markets also have strikingly similar objectives. Each prefers a high rate of return to a low one, certainty to uncertainty, low risk to high risk. Finally, security law mandates that both parties to a transaction must have equal access to the same material facts.
As researchers over the years learned more and more about the behavior of prices in financial markets it became useful to split the notion of efficient markets into three progressively more rigorous forms. The weak form describes a market in which historical price data are efficiently digested and, therefore, are useless for predicting subsequent price changes. The semi-strong form describes a market in which all publicly available information is fully reflected in prices and therefore all publicly available information is useless for predicting subsequent price changes. Finally, the strong form describes a market in which not even those with privileged inside information can use such information to obtain superior investment results.