There is an important debate among investors about the effectiveness of the stock market, namely whether it reflects all information availab...
There is an important debate among investors about the effectiveness of the stock market, namely whether it reflects all information available to market participants at any one time. The actual market hypothesis (EMH) states that all stocks are ideally priced based on their underlying investment characteristics, which are also owned by all market participants.
Financial theories are subjective. In other words, there are no proven rules in finance. Here, we take a look at where the actual market hypothesis failed to explain the behavior of the stock market.
Principles and variations of the actual market scenario (EMH)
There are three principles of an effective market hypothesis: weak, almost strong, strong.
The weakest assumes that current stock prices reflect all available information.
It goes further by saying that the previous performance has nothing to do with what the future hides for the arrow. It is therefore assumed that technical analysis cannot be used to obtain returns.
The quasi-strong form of the theory states that stock prices are factored into all publicly available information. Therefore, investors cannot use basic analysis to outperform the market and make significant profits.
In the strong form of the theory, all information, public and private, has already been taken into account in stock prices. So no one is supposed to have the advantage of the information available, both inside and out. Hence, this means that the market is perfect and making excessive profits from the market is next to impossible.
EMH problems
While it may sound fascinating, this theory is not without its criticisms.
First, an effective market hypothesis assumes that all investors know all available information in exactly the same way. Various methods of stock analysis and valuation raise questions regarding the validity of the EMU system. If one investor is looking for undervalued market opportunities while another is evaluating the stock based on its growth potential, these investors have already presented a different assessment of the stock's fair market value. Therefore, an argument against EMH suggests that because investors value shares differently, it is impossible to determine the value of the shares in an actual market.
Second, no single investor can get a higher return than any other investor in the same amount of money invested in an effective market assumption.
