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Efficient market hypothesis suggests stock prices reflect all available information from "summary" of A Random Walk Down Wall Street by Burton Gordon Malkiel
The efficient market hypothesis suggests that stock prices reflect all available information. This means that the prices of stocks are always accurate and fair, incorporating all public and private information about a company. In an efficient market, it is impossible for an investor to consistently outperform the market by picking undervalued or overvalued stocks. The theory behind the efficient market hypothesis is that in a competitive market, information is quickly and accurately reflected in stock prices. This implies that any information, whether it is positive or negative, will be factored into the price of a stock almost immediately. Therefore, stock prices are always up-to-date and reflect the true value of a company based on all available information. Proponents of the efficient market hypothesis argue that it is extremely difficult to beat the market over the long term through stock picking or market timing. This is because any attempt to gain an edge by exploiting information or trends will be quickly absorbed by the market, leading to prices adjusting accordingly. As a result, the theory suggests that it is better for investors to adopt a passive investing strategy, such as investing in index funds, rather than trying to outsmart the market. Critics of the efficient market hypothesis argue that there are instances where stock prices do not accurately reflect all available information. They point to examples of market bubbles, where stock prices become detached from their fundamental values, as evidence that markets are not always efficient. However, proponents of the efficient market hypothesis argue that these instances are rare and do not disprove the overall validity of the theory.- The efficient market hypothesis is a cornerstone of modern finance theory, shaping how investors approach the stock market. By understanding and accepting the idea that stock prices reflect all available information, investors can make more informed decisions about their investment strategies and expectations.
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