The Efficient Market Hypothesis (EMH) is a theory in finance that suggests that financial markets are efficient, meaning that prices of stocks and other securities fully reflect all available information. According to this hypothesis, it is impossible to consistently achieve above-average returns in the market because prices are already adjusted for expected outcomes. Essentially, the hypothesis states that it is not possible to consistently beat the market by trading based on publicly available information.
The EMH is based on three forms: weak, semi-strong, and strong. The weak form suggests that past prices and volume information cannot be used to predict future prices; semi-strong form suggests that publicly available information, including financial statements, news, and other announcements, are already reflected in prices; and the strong form claims that even non-public or insider information cannot be exploited to achieve abnormal returns. While the EMH has its critics, it has had a significant impact on the world of finance as it has shaped investment strategies and risk management techniques. Understanding and evaluating the EMH is essential for investors looking to navigate the complexities of financial markets.