Efficient market hypothesis
Also called: EMH, random walk
The efficient market hypothesis says stock prices already reflect all available information, so no one can consistently beat the market except by luck or by taking more risk.
Eugene Fama formalised it in 1970. Its weak form says past prices can't predict future ones; the strong form says even private information is priced in. Bubbles and crashes are the main evidence against it.
It's the main argument for index funds.
Related terms
- Index fund: An index fund is a fund that buys every stock in a market index, such as the S&P 500, in the same proportions, so it matches the market's return instead of trying to beat it.
- Information asymmetry: Information asymmetry is when one side of a deal knows more than the other.
- Volatility: Volatility measures how much and how quickly a price moves up and down, usually as the annualized standard deviation of its returns.
Practise with $10,000 in play money
Free. No real money involved.
For learning only. This isn't financial advice.