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Efficient Market Hypothesis

The Efficient Market Hypothesis (EMH) is a financial theory suggesting that asset prices fully reflect all available information. It implies that all investors have equal access to the same information about a company’s prospects, so no one can gain an upper hand on others and consistently profit from trading shares.

EMH suggests that it’s impossible to “beat the market” as the stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. This theory is divided into three forms: weak form efficiency (past price information is reflected in the current price), semi-strong form efficiency (all public information is reflected in current prices), and strong form efficiency (all public and private information is fully reflected in the market prices).

The EMH supports the idea of investing in index funds which aim at matching the overall market performance, rather than trying to pick an outperforming stock which could lead to riskier portfolios. However, critics argue that the market often overreacts or underreacts to news, creating opportunities for profit.

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