The efficient market hypothesis (EMH) holds that capital market prices fully and correctly reflect the knowledge and expectations of all investors. This implies that any publicly available information set, say f , is compounded into share prices in such a speed that there are no trading opportunities for investors to generate economic profits by trading on the basis of f . Under this hypothesis, it is futile to seek undervalued securities or to forecast market movements.

EMH assumes that securities markets are characterized by a large number of profit driven independent individuals where new information regarding securities arrives in a random manner. Under this setting, investors react to new information immediately. They buy and sell the security until they feel the market price reflects correctly the new information. In this market, the process of determining prices is a 'fair game' where there is no way of using the information available at a point in time to earn abnormal return. In such a market share prices are right and reflect all publicly available information regarding the value of the company.

The efficient market hypothesis has, historically, been subdivided into three categories, each dealing with a different type of information. The first is the weak form market efficiency hypothesis where security prices reflect all security market information including all past prices, volumes, etc. This hypothesis holds that current prices cannot be predicted from past price patterns. The second is the semi-strong form of market efficiency where current share prices fully reflect not only historical information but also all publicly available information relevant to the company's securities. The third is the strong form of market efficiency where market prices fully reflect all public and private information that is known to all market participants about the company.