Efficient Market Hypothesis (EMH) - Financial definition
Concise definition of the term Efficient Market Hypothesis
The Efficient Market Hypothesis (EMH) asserts that financial markets fully reflect all available information, making it impossible for investors to consistently achieve higher returns than average market returns through stock picking or market timing.
Comprehensive definition of the term Efficient Market Hypothesis
The Efficient Market Hypothesis, formulated by Eugene Fama in the 1960s, posits that stock prices at any given time incorporate and reflect all relevant information. This implies that stocks always trade at their fair value on exchanges, rendering it futile for investors to either purchase undervalued stocks or sell stocks for inflated prices.
Practical examples of EMH include the difficulty of consistently outperforming the market through active management, as evidenced by the performance of most mutual funds relative to passive index funds. Market practices like high-frequency trading and algorithmic trading are often cited as mechanisms that contribute to market efficiency, rapidly integrating new information into stock prices.