Efficient Market Hypothesis

Topics: Stock market, Fundamental analysis, Efficient-market hypothesis Pages: 3 (812 words) Published: April 15, 2013
In your own words, write down the three forms of efficient market hypothesis, emh how do they differ? What are the consequences for an investor?

Efficient market hypothesis (EMH) is investment theory. It states stocks are regularly exchanged for a moderate value on stock exchanges. Thus, it is hardly possible for investors to either invest in undervalued stocks or sell stocks for amplified prices. The three forms are:

1. Weak form EMH
The weak form EMH designates market is efficient when the past market information are provided. This hypothesis considers that the historical prices, volume and other market information have no contribution towards to forecast future market prices. If the stock price changes are irregular then the historical prices cannot be used to predict future prices. If the hypothesis is accurate it rejects technical analysis. Weak form EMH suggests analysis can be used to analyse stock values that are underestimated and overestimated. Therefore, investors review profitable companies to gain profit by analysing their financial accounts.

2. Semi-Strong form EMH
The semi-strong form EMH designates market is efficient when the public market information are provided. This hypothesis considers all public information is figured into a stock’s current share price. The semi-strong form suggests market prices emulates from publicly obtainable information and forecasts about the future. This form shows stock prices adapts immediately to new information and past information cannot be used for greater achievements. If the hypothesis is accurate it rejects fundamental analysis. The semi-strong form EMH includes weak form EMH. Semi-Strong form EMH suggests that only obtainable information that is not publicly published can have advantage to investors who are seeking for unexpected returns on investments. Assuming when stock prices reflect the new obtainable information and investors that purchase the stocks after using the information, investor...
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