The Efficient Market Hypothesis (EMH) is a theory that says stock prices always reflect all available information. That means you can’t consistently beat the market using tips, analysis, or timing—because the market already “knows” everything.
Think of it like a classroom where everyone hears the news at the same time—no one has an edge.
Key Idea
According to EMH:
- Stocks trade at their fair value at all times.
- New information is quickly absorbed into stock prices.
- Beating the market is only possible by chance, not skill.
Types of EMH
There are three forms of EMH based on how much information is reflected in prices:
1. Weak Form EMH
- Prices reflect all past trading data—like prices and volumes.
- Technical analysis is useless.
- Fundamental analysis might still help.
2. Semi-Strong Form EMH
- Prices reflect all publicly available info—news, reports, earnings, etc.
- Neither technical nor fundamental analysis can help.
- Only insider info might give an edge.
3. Strong Form EMH
- Prices reflect all information—public and private.
- Even insiders can’t consistently beat the market.
- Purest, strictest form of efficiency.
Real-Life Example
Say a company announces record profits:
- According to EMH, the stock price will instantly adjust.
- So, by the time you hear the news and try to buy the stock, the price already reflects that info.
Impact of EMH
Positive Effects
- Promotes passive investing like index funds.
- Supports fair and transparent pricing.
- Suggests that low-cost investing is better than high-fee active trading.
Limitations/Criticisms
- Ignores emotional trading and market bubbles.
- Many investors do beat the market (like Warren Buffett).
- Behavioral economics shows that people don’t always act rationally.
Summary Table
| Aspect | Details |
|---|---|
| Meaning | Stock prices fully reflect all available info |
| Main Idea | You can’t consistently beat the market |
| Types | Weak, Semi-Strong, Strong |
| Tools ineffective | Technical (all), Fundamental (most), Insider (some) |
| Supports | Passive investing, index funds |
| Criticized for | Ignoring market irrationality & bubbles |
Final Thought
EMH tells us: don’t chase tips, trust the market, invest long-term. But real markets aren’t always perfect, so combining EMH with smart strategy and discipline can help you grow wealth steadily.
