The efficient market hypothesis (EMH) is an investment theory launched by Eugene Fama, which holds that investors, who buy securities at efficient prices, should be provided with accurate information and should receive a rate of return that implicitly includes the perceived risk of the security. The term “new information” implies information that could not be predicted, because, in this case, it would have been integrated into the market price. In this aspect, securities trade at their fair value protecting investors from buying undervalued stocks or selling overvalued stocks. On the other hand, the only possible way to outperform an efficient market is to accept a higher level of investment risk.
In a nutshell :
- The efficient market hypothesis (EMH) or theory states that share prices reflect all information.
- The EMH hypothesizes that stocks trade at their fair market value on exchanges.
- Proponents of EMH posit that investors benefit from investing in a low-cost, passive portfolio.
- Opponents of EMH believe that it is possible to beat the market and that stocks can deviate from their fair market values.