Efficient Markets and Investor Expectations

In an efficient market, asset prices are influenced by investor expectations.

Investors form expectations about future cash flows, risk, growth, and required return. When new information arrives, these expectations change. Based on their revised views, some investors buy the asset while others sell it.

The market price is formed through this buying and selling process.

Example:
Suppose a stock is trading at ₹1,000. Investors expect the company to grow at 8% per year.

Now the company announces a new product launch, and investors believe that future growth may increase to 12% per year. Because of this higher growth expectation, more investors may start buying the stock.

As demand increases, the stock price may rise from ₹1,000 to ₹1,150.

This price change reflects the revised expectations of investors.

So, an efficient market continuously updates prices based on new expectations.