The Efficient Market Hypothesis (EMH) is a theory that states that financial markets are “informationally efficient,” meaning that the prices of securities fully reflect all available information about those securities. According to this theory, it is not possible for an individual investor or a group of investors to consistently earn returns that are higher than the average returns of the market as a whole, because all relevant information is already incorporated into market prices.
The EMH has three forms:
- Weak form: This form of the EMH states that all past market prices and trading volume data are already reflected in current prices.
- Semi-strong form: This form of the EMH states that all publicly available information, including financial statements, news articles, and analyst reports, is already reflected in current prices.
- Strong form: This form of the EMH states that all information, whether public or private, is already reflected in current prices.