Cogito

Efficient Market Hypothesis Explained

Posted in Uncategorized by qmarks on June 12, 2009

stock research

If markets are efficient, all information about the value of shares, currencies, or bonds is already reflected in the price, and research is useless. In an efficient market, traders cannot profit from trading on publicly available information (and that includes research reports) in a way that allows them to “beat the market.” But if there is no research, how can markets be efficient?
This puzzle is best illustrated by the joke about the economist who is walking along the street when his wife points out a ten dollar bill on the pavement. “Don’t be silly,” he replies. “If there was one, someone would have already picked it up.” There is no point bending down to pick up a ten-dollar bill because someone would have done so already. The sidewalk is efficient. But if nobody bends down to pick up the money, it will still be there.

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