EFFICIENT MARKET HYPOTHESIS (EMH)

The Efficient Market Hypothesis (EMH), pertains to the economic theory that stipulates that financial markets are reflective of all available information pertinent to the value and price of assets. This is given at any point in time.

The theory was developed by one Eugene Fama in the 60s. Fama proposes that an investor gaining an edge over the market in the long run is an outright impossibility. This is the case as assets are valued in accordance to their fair price. This should be the case as all information made known will be traded on until its usefulness reaches an end.

Efficient markets are divided into three categories, namely: weak, semi-strong, and strong.

While the EMH theory is an already long-established, and therefore well-known, theory, it is not exempt from criticism. The validity of the hypothesis has yet to be either proven or disproven. Nevertheless, the theory’s opponents strongly hold on to the belief that there is a myriad of emotional factors that play into the valuation of stocks.