Efficient Market Hypothesis (EMH): The Relevance Of Information In The Stock Market

Efficient Market Hypothesis shows that investors can only use information as a tool for gaining in the stock market by making better informed decisions.

As you grow up, you come to the realization of a few logical truths. One of such realizations is that love is never unconditional, and it changes with new information. No matter how much you want to argue, you know that your crush on that guy might just disappear in an instant if you find out that he is a ritualist or even maybe you found out that he has a terminal ailment.

As such, the introduction of new information makes your initial predictions almost completely irrelevant.

In the stock market, many experienced investors have lost huge sums of money and this is one of the primary reasons why. Efficient market hypothesis is a theory that simply states that the prices of assets or stocks are a reflection of all available information.

What this means is that all known information about investment securities is already factored into the prices of those securities and it would only move based on the flow of information in the market.

The implication of this is that an individual cannot be smarter than the entire market ecosystem and his or her analysis is essentially based on this collective information. A great example of this is how speculation itself can alter the prices of stocks whether the information being speculated on is correct or not.

It does not take cognizance of logic as usually when a group of people (investors) start acting in a particular way, the market moves in the same direction.

Efficient Market Hypothesis has become a tool used to test how responsive the stock market is before it reacts to new information. For example, if there are speculations of a recession or war, how far does the information need to spread before it affects stock prices?

Does it need to be public information first, known by some people, or is it capable of changing prices even when it is just a rumor. The underlying tenet of EMH efficiencies is that an investor cannot use superior technical know-how to gain an advantage and can only move like the entire market of investors based on the available information or by taking more risk.

In determining market efficiency, three interesting variants exist. They include: Weak efficiency, Semi-strong efficiency, and Strong form efficiency.

Weak Form Efficiency

Weak Form Efficiency denotes that available prices on traded assets are already based on publicly available information and previous price movements would not affect stock prices. In other words, it means all relevant information is known and already being reflected.

Hence, no matter how an investor tries to beat the system, he is limited to only publicly available information. More like Warren Buffet knows exactly what a regular active investor knows about the prices of stock.

Semi-Strong Form Efficiency

Semi-Strong Form Efficiency is an hybrid of weak form and strong form. It says that all the available prices or market indices while reflecting the publicly available information, still reacts to new public information. Neither fundamental nor technical analysis can provide an advantage for an investor.

Strong Form Efficiency

The strong form EMH takes it a step further. The idea here is that prices instantly reflect any atom of information even when it is not public like insider information. When all information, both public and private, is reflected in stocks, no investor can have an advantage over the market as a whole anymore.

The knowledge of the information simply helps them in making more-guided decisions.

Efficient Market Hypothesis simply goes to show that information is the primary tool you need to win in the stock market.

The Yochaa app is an entire body of information into the Nigerian stock exchange and it, without a doubt, will keep you informed and ready to make informed decisions.