What is Efficient Market Hypothesis (EMH)?

The idea of the efficient market hypothesis (EMH) was first proposed by economist Eugene Fama in the 1960s. It's a theory that states that financial markets accurately disclose all available information on asset prices. Basically, Fama argued that it’s practically impossible for investors to acquire a long-term advantage over the market.

There are three levels of available information – weak, semi-strong, and strong.

• The weak level of information signifies that current prices consider all prior data. Because of that, technical analysis is irrelevant. Though it leaves out other types of data. Besides, it doesn't rule out the possibility of using such techniques as fundamental analysis or comprehensive research.
• The semi-strong level of information implies that all public information has been included in the pricing. Thus, even the fundamental analysis is useless in this case. The advantage over the market can only be gained by using confidential information. To be more precise, using information, which is not available to the public yet.
• The strong level of information implies that all public and private information is represented in an asset's price. This level implies that no market participant can get an advantage with any type of knowledge. This is the case because the market has already considered it all.

Though keep in mind that apart from the fact that EMH is a well-known theory, its validity is not yet properly verified or denied by empirical data. However, many people believe that a variety of emotional factors could cause stock undervaluation or overvaluation.