Efficient Market Hypothesis (EMH)

The Efficient Market Hypothesis (EMH) is a financial theory that suggests all available information is fully reflected in a stock’s price, making it impossible for investors to consistently outperform the market through stock picking or market timing. EMH proposes that markets are efficient, and prices always incorporate and reflect all relevant information, whether past, current, or future. EMH is divided into three forms: weak, semi-strong, and strong, each varying in the degree of market efficiency. The theory challenges the effectiveness of active investment strategies, promoting the idea that passive investing is the best approach.

Example

According to EMH, an investor cannot consistently achieve higher returns than the market by analyzing publicly available information, as it is already priced in.