The Efficient Market Hypothesis (EMH) proposes that financial markets are always perfectly efficient, meaning that it's impossible to consistently achieve higher-than-average returns because all relevant information about a stock is already reflected in its price.
Now, imagine you’re at a big, bustling marketplace – you got people haggling, folks swapping insider tips, and every piece of information, rumor, or prediction about every single item up for sale gets swept up in that big, loud whirlwind. That’s kinda like how the stock market works.
Let’s bring in this guy called the Efficient Market Hypothesis, or EMH for short. EMH struts into this chaotic scene and says, “Hey, hold up. You can’t outsmart the market. The market knows all.”
According to EMH, every stock, every bond, and every little piece of the financial pie is priced just right. That’s right, EMH is saying that the market’s the smartest player in the room. It’s got all the relevant information. It’s heard all the rumors. It’s seen all the predictions. And it takes all that stuff into account to set the price. Did you get info on a company’s new game-changing product? So does the market. Have you read the latest earnings report? So has the market.
EMH says there are no deals under the table. No underpriced stocks. No surefire bets. Because the markets always one step ahead, it’s efficient, hence the name. And if you think you’re going to beat the market consistently, EMH is there, shaking its head, saying, “Nah, you’re just getting lucky.”
But hold up, let’s not get too carried away. There are critics of EMH too. They argue that sometimes, the market can act like it’s got its headphones on, ignoring valuable information. And these are the moments they look for when they think they can outsmart the market.
So, remember, while EMH has got its appeal, it’s not the be-all and end-all. It’s like one song in the grand symphony of investment theories.