What does the efficient market hypothesis (EMH) claim about asset prices?

The efficient market hypothesis (EMH) asserts that asset prices reflect all available information at any given time. This means that stocks and other securities are priced perfectly based on the collective knowledge and expectations of all market participants. In an efficient market, any new information is quickly assimilated into asset prices, which makes it impossible for investors to consistently achieve higher returns than the average market return on a risk-adjusted basis.

This concept underlines the idea that markets are rational, and therefore, prices will always adjust promptly to incorporate new data. As a result, investors cannot rely on historical price movements or market speculation to gain an advantage, as it is already included in the current price.

Understanding the implications of EMH is crucial for investors as it suggests that trying to predict price movements or outperform the market through either fundamental or technical analysis might not provide the expected results, since any information that could lead to a profit is already reflected in the asset's current price.