Efficient market hypothesis (EMH).
In plain English
The efficient market hypothesis argues that competition among investors pushes new information into prices quickly, leaving little predictable advantage in publicly known facts. It comes in three strengths. The weak form says past prices alone cannot predict future ones, the semi-strong form says public information is already priced in, and the strong form says even private information is reflected. The strongest version is widely rejected, which is part of why insider trading laws exist at all. The hypothesis does not claim prices are correct, only that they are hard to beat after costs.
01Why it matters
If prices already contain the obvious information, then the reliable edge left to a small investor is cost, taxes, and behavior, not information.
02The math, step by step
A company reports earnings well above expectations and the stock jumps 8 percent in the first minute. Someone who reads the news release ten minutes later and buys pays the new price. The information was real, but the profit from it was gone before it reached the general public.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Efficiency is not accuracy. The hypothesis says prices absorb information fast, not that the resulting price is the correct value of the business. Prices can be wrong and still be hard to beat, because knowing they are wrong does not tell anyone when they will correct.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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