Efficient market hypothesis

From MarketsWiki
Jump to: navigation, search
Nasdaq Banner 728x90.jpg

The Efficient Market Hypothesis is an investment theory that states that at any given time, stock prices fully reflect all available information. It is therefore impossible to "beat the market" by purchasing undervalued stocks or selling stocks for inflated prices.

Securities markets are flooded with intelligent, well-paid, and well-educated investors seeking under and over-valued securities to buy and sell. The more participants and the faster the dissemination of information, the more efficient a market should be. If markets are efficient and current prices fully reflect all information, then buying and selling securities in an attempt to outperform the market will effectively be a game of chance rather than skill.

The Efficient Market Hypothesis evolved in the 1960s from the Ph.D. dissertation of Eugene Fama. Although it is a cornerstone of modern financial theory, the EMH is highly controversial and often disputed. Investors such as Warren Buffett, for example, have consistently beaten the market over long periods of time, which according to the EMH is impossible.[1]

In addition, events like the 1987 stock market crash, when the Dow Jones Industrial Average (DJIA) fell by more than 20 percent in a single day, are viewed by some as evidence that stock prices can seriously deviate from their fair values.[2]


References

  1. The Efficient Market Hypothesis and The Random Walk Theory. Investor Home.
  2. Efficient Market Hypothesis (EMH). Investopedia.