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Efficient Market Hypothesis (EMH)
The Efficient Market Hypothesis (EMH) is a theory in finance that suggests that financial markets are “efficient” and that stock prices reflect all available information at any given time. This means that it is impossible to consistently outperform the market through stock selection or market timing, as all relevant information is already reflected in stock prices.
According to the EMH, markets are efficient because there are many investors competing to find the best investment opportunities. These investors all have access to the same information and use this information to buy and sell securities, which causes prices to adjust quickly and reflect the new information. As a result, it is difficult for any single investor to gain an advantage over others by using the same information.
The EMH has several implications for investors. For example, if markets are efficient and prices already reflect all available information, then attempting to beat the market through stock picking or market timing is unlikely to be successful in the long run. Instead, investors may be better off focusing on asset allocation, diversification, and low-cost indexing strategies. The EMH has been subject to some criticism and debate, particularly in light of the 2008 financial crisis and other market anomalies. Some argue that markets may not always be efficient, particularly in the short-term, and that investors may be able to gain an edge by identifying mispricings or market inefficiencies. However, the EMH remains an important and influential theory in finance, and it continues to inform many investment strategies and approaches today.
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