An efficient market is a market where asset prices reflect available information quickly and rationally.
This means that when new information enters the market, investors analyze it, revise their expectations, and trade accordingly. As a result, the price of the asset adjusts to reflect that information.
In an efficient market, it is difficult for investors to earn abnormal profits consistently because the market price already includes most available information.
Example:
Suppose a company stock is trading at ₹500. The company announces that its profit has increased by 25%, which is better than expected. Investors may now believe that the company will generate higher future cash flows.
As more investors start buying the stock, the price may quickly rise from ₹500 to ₹560. This increase happens because the market has adjusted the stock price based on the new information.
So, an efficient market does not mean prices are always correct. It means prices respond quickly to information.