Efficient Market Hypothesis (EMH)

Efficient Market Hypothesis (EMH) Explained

• The Efficient Market Hypothesis (EMH) is explained with examples.
• Sonu from Tech2 simplifies the EMH concept in the video.

How News Affects Share Prices

• Positive news, such as increased company profits, decreased debt, new acquisitions, or successful projects, can increase share market value.
• Negative news can lead to a decrease in a company's share market value.
• Share prices of listed companies reflect fair value, influenced by external factors.
• Market fluctuations are triggered by news and investor reactions.

Core Concept of Efficient Market

• Share prices move independently and are not based on previous prices.
• Current prices are determined by demand and supply, not historical values.
• The market prices reflect all available relevant information.
• Share price incorporates all known information.
• In an efficient market, outperforming the market is impossible.

Efficient Market Hypothesis (EMH) in Detail

• Hypothesis implies an assumption or theory that might be true or false.
• The Efficient Market Hypothesis (EMH) is also known as Efficient Market Theory.
• Eugene Fama introduced EMH in 1970.
• The stock market is efficient, and prices move independently.
• Future market prices cannot be predicted accurately.
• Due to its unpredictability, investors cannot consistently outperform the market.
• Achieving higher returns requires taking higher risks.
• Short-term gains are possible, but consistent long-term profits are unlikely.

Forms of Efficient Market Hypothesis

• EMH has three forms, each with varying degrees of realism: Weak, Semi-Strong, and Strong.

Weak Form

• Technical analysis cannot yield consistent profits because past prices do not predict future movements.
• Short-term gains are possible, but consistent profits from technical analysis are unlikely.
• Fundamental analysis (examining financial statements) can provide an advantage.
• This form is considered more realistic.

Semi-Strong Form

• Gaining an advantage through analyzing publicly available information is not possible.
• Technical and fundamental analysis will not lead to above-average returns.
• Investors cannot gain an edge even with available reports.
• Information is already factored into stock prices.

Strong Form

• No information, including insider knowledge, can provide an advantage.
• Even private information is immediately priced into the market.
• Insider trading or illegal use of information provides an edge but is unethical and illegal.
• This form of EMH is considered unrealistic.
• Prices immediately adjust to all information, making it impossible to consistently outperform the market.
• It contrasts with investors who believe market inefficiencies allow them to achieve better returns through analysis.
• Acceptance of EMH varies among individuals.
• Some investors believe they can take advantage of market inefficiencies.