In an efficient market, there are usually a large number of active traders operating in the market.
Efficient markets are those where the flow of relevant information about investment options is easily accessible and reliable. In such a market situation, anyone involved in the trading activity can use the information to assess the past performance of the security in question. The trader can also accurately identify the reasons for the current unit price and responsibly project future security performance based on current indicators.
In an efficient market, there are usually a large number of active traders operating in the market. A given broker may actively buy securities and sell other securities at the same time, based on the strength of the current unit price and projections of the security’s short-term and long-term performance. Because the information about the securities in question is so well defined and easily accessible, trading is done with complete confidence in the return that will be realized on each transaction.
One of the advantages of an efficient market is that there is no real incentive to start arbitrage trades in order to build a strategy for a decent return. The detail of the existing information is such that it is relatively easy to minimize the difference between the projected return and the degree of risk involved. Often, it is the current prices of bonds being bought and sold that serve as the leading indicator, although other factors can help strengthen price’s position as an indicator.
When there is an efficient market, the quality of the information available is very precise. The details are carefully scrutinized, broken down in a way that both the investor and the broker can easily assimilate, and are being used by many investors to transact in the market. While an efficient market does not entirely remove the element of risk from any type of trading activity, transactions conducted in such an efficient market are generally considered to be less volatile in nature, assuming unforeseen factors do not significantly alter the general market climate.
As with any trading market, investors operating in an efficient market are advised to evaluate all information in a timely manner. This helps to further minimize the element of risk and increases the opportunity to earn money from trading.