Information plays the most important role in efficient markets.
Prices change when investors receive new information and believe that the information affects the value of an asset. This information may be related to earnings, interest rates, economic growth, inflation, government policy, or company-specific news.
In an efficient market, information is incorporated into prices through trading.
Example:
Suppose inflation rises from 5% to 7%. Investors may expect the central bank to increase interest rates. Higher interest rates can reduce company profits and make borrowing more expensive.
Because of this, investors may sell stocks. If many investors sell, stock prices may fall.
For example, a stock trading at ₹900 may fall to ₹840 after the inflation data is released.
This shows how economic information can affect asset prices in an efficient market.