Prices reflect all available information
Efficient-market hypothesis
Prices reflect all available information
The efficient-market hypothesis (EMH) posits that asset prices incorporate all known information, making it impossible to consistently outperform the market through stock selection or market timing.
The EMH suggests that since prices already reflect all available information, any new information would be quickly absorbed into asset prices, negating the potential for systematic gains.
Research since the 1990s has focused on market anomalies, deviations from specific risk models, to test the validity of the EMH.
Example
A company releases its earnings report. If the EMH holds true, the stock price will quickly adjust to reflect this new information, making it difficult for investors to gain an advantage.
Remember this
Understanding the EMH helps investors recognize the limitations of market timing and stock selection, guiding them towards risk-adjusted investment strategies.
Text adapted from Wikipedia, licensed under CC BY-SA 4.0.
Related concepts
Financial market efficiency
Market efficiency measures how quickly prices reflect available information
Stock market
Why do stock prices sometimes soar beyond what numbers suggest?
Supply and demand
Market-clearing price where quantity supplied equals quantity demanded
Prediction market
Why does betting on the future cost more to place than to take?
Bias ratio
Bias ratio detects valuation bias in asset pricing
Overconfidence effect
Overconfidence leads to overtrading and underperformance
Educational content, not financial advice.
Swipe through 100 ML concepts daily
Open Pocket Polymath