Efficient market hypothesis (EMH)

Definition

Efficient market hypothesis (EMH) in plain English

Imagine a stock's price as a scoreboard that instantly updates the moment any news breaks — good or bad. The efficient market hypothesis says that scoreboard is already correct: whatever is publicly known about a company is baked into its price right now, so you can't reliably beat the market just by reading last week's headlines. Why care? If it's true, hunting for 'obvious' bargains is mostly luck, and cheap index funds make a lot of sense. The catch is it assumes lots of smart buyers and sellers competing fast — real markets get close to this but aren't perfectly efficient.

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• Arbitrage pricing theory (APT)
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• Clientele effect
• Collateralized debt obligation (CDO)