How is market efficiency defined?

Market efficiency is defined as the extent to which stock prices reflect all available information. This concept is a core principle of the Efficient Market Hypothesis (EMH), which posits that in an efficient market, all relevant information—such as company earnings, economic indicators, and geopolitical events—is already incorporated into stock prices. As a result, it becomes impossible for investors to achieve consistently higher returns than the overall market without taking on additional risk.

In an efficient market, any new information is quickly and accurately reflected in stock prices. Therefore, when an investor examines a stock, they can assume that the price they see reflects all known information about the stock. This quality of the market allows investors to make informed decisions based on the current price rather than speculation.

Other choices address different aspects of the market and investment environment. For example, a company's ability to grow its market share focuses on business performance rather than market dynamics. Regulation of stock trading pertains to the legal and procedural framework governing trades, which is separate from efficiency. The level of investor knowledge about market conditions also does not directly define market efficiency, as it relates more to individual investors rather than the collective information reflected in stock prices.