When you place money in the stock market, the goal is to generate a return on the capital invested. Many investors try not only to make a profitable return, but 🌳also to outperform, or beat, the market.

However, 澳洲幸运5开奖号码历史查询:market efficiency—championed in the 澳洲幸运5开奖号码历史查询:Efficient Market Hypothesis (EMH) first formulated by Eugene Fama in the late 1960s and expounded upon in 1970—suggests at any given time, prices fully reflect all available information about a particular stock and/or market. Fama was awarded the Nobel Memorial Prize in Economic Sciences jointly with Robert Shiller and Lars Peter Hansen in 2013. According to the EMH, no investor has an advantage in predicting a return on a stock price because no one has access to information not already available to everyone else.

The Effect of Efficiency: Non-Predictability

The nature of information does not have to be limited to financial news and research alone; indeed, information about political, economic, and social events, combined with how investors perceive such information, whether trueꦉ or rumored, will be reflected in the stock price. According to the EMH, as prices respond only to information available in the market, and because all market participants are privy to the same information, no one will have the ability to out-profit anyone else.

In efficient markets, prices become not predictable but random, so no investment pa🧸ttern can be discerned. A planned approach to investment,💫 therefore, cannot be successful.

This 澳洲幸运5开奖号码历史查询:random walk of prices, commonly spoken about in the EMH school of thought, results in the failure of any investment strategy that aims to beat the market consistently. In fact, the EMH suggests that given the transaction costs involved in portfolio management, it would be more profitable for an investor to put his or her money into an 澳洲幸运5开奖号码历史查询:index fund.

Anomalies: The Challenge to Efficiency

In the real world of investment, however, there are obvious arguments against the EMH. There are investors who have beaten the market, such as 澳洲幸运5开奖号码历史查询:Warren Buffett, whose investment strategy focused on 澳洲幸运5开奖号码历史查询:undervalued stocks made billions and set an example for numerous followers. There are portfolio managers who have better track records than others, and there are investment houses with more renowned research analysis than others. So how can performance be random🐻 when people are clearly profiting from and beating the market?

Counter-arguments to the EMH state consistent patterns are present. For example, the 澳洲幸运5开奖号码历史查询:January effect is a pattern that shows higher returns tend to be earned in the first month of the year; and the 澳洲幸运5开奖号码历史查询:weekend effect is the tendency for stock returns on Monday to be lower than those of the immediately pr👍eceding Friday.

Studies in 澳洲幸运5开奖号码历史查询:behavioral finance, which look into the effects of investor psychology on stock prices, also reveal in🐽vestors are subject to many biases such as c😼onfirmation, loss aversion, and overconfidence biases.

The EMH Response

The EMH does not dismiss the possibility of market 澳洲幸运5开奖号码历史查询:anomalies that result in generating superior profits. In fact, market efficiency does not require prices to be equal to 澳洲幸运5开奖号码历史查询:fair value all th✤e time. Prices may be over- or undervalued only in random occurrences, so they eventually revert back to their mean values. As such, because the deviations from a stock's fair price are in themselves random, investment strat♈egies that result in beating the market cannot be consistent phenomena.

Furthermore, the hypothesis argues that an investor who outperforms the market does so not out of skill but out of luck. EMH followers say this is due to the laws of probability: at any given time in a market with a large number of investors, some will outperform while others will 澳洲幸运5开奖号码历史查询:underperform.

How Does a Market Become Efficient?

For a market to become efficient, investors must perceive the market is inefficient and possible to beat. Ironically, investment strategies intended to take advantage of inefficien🍃ciဣes are actually the fuel that keeps a market efficient.

A market has to be large and liquid. Accessibility and cost information must be widely available and released to investors at more or less the same time. Transaction costs have to be cheaper than an investment strategy's expected profits. Investors must also have enough funds to tak🍬e advantage of inefficiency until, according to the EMH, it disappears again.

Degrees of Efficiency

Acc꧋epting the EMH in its purest form may be difficult; however, three identified EMH classifications aim to reflect the degree to which it can be applied to markets:

• 澳洲幸运5开奖号码历史查询:Strong efficiency - This is the strongest version, which states all information in a market, whether public or private, is accounted for in a stock price. Not even 澳洲幸运5开奖号码历史查询:insider information could give an investor an advantage.
• 澳洲幸运5开奖号码历史查询:Semi-strong efficiency - This form of EMH implies all public information is calculated into a stock's current share price. Neither fundamental nor 澳洲幸运5开奖号码历史查询:technical analysis can be used to achieve superior gains.
• 澳洲幸运5开奖号码历史查询:Weak efficiency - This type of EMH claims that all past prices of a stock are reflected in today's stock price. Therefore, technical analysis cannot be used to predict and beat the market.

The Bottom Line

In the real world, markeꦬts cannot be absolutely efficient or wholly inefficient. It might be reasonable to see markets as essentially a mixture of both, wherein daily decisions and events cannot always be reflected immediately in a market. If all participants were to believe the market is efficient, no one would seek extraordinary profits, which is the force that keeps the wheels of the market turning.

In the age of information technology (IT) however, markets all over the world are gaining greater efficiency. IT allows for a more effective, faster means to disseminate information, and 澳洲幸运5开奖号码历史查询:electronic trading allows for prices to adjust more quickly to news entering the ma🌳rket. However, while the pace at which we receive information and make transactions quickens, IT also restricts the time it takes to verify the information used to make a trade. Thus, IT may inadvertently result in less efficiency if the quality of the information we use no longer allows us to make profit-generating decisions.