In this essay I will critically analyze the validity of the strong form of the Efficient Market Hypothesis while simultaneously evaluating the Efficient Market Hypothesis, to determine its credibility today. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an original essay In order to critically analyze the strong form of the efficient market hypothesis, I will first define the hypothesis, its different forms, and evaluate its credibility. A key proponent of the EMH and one of the leading economists who helped publicize it was Eugene Fama. Fama (1970) states that in an efficient market prices fully reflect all available information. The efficient market hypothesis proposes that when new information emerges, it spreads rapidly and is then factored into the prices of investment securities without delay. Investment securities are securities purchased to be held for investment purposes. Since all investors now have access to the same information, changes in stock prices are no longer predictable and now respond immediately to new information. This implies that there is no amount of analysis that can give an investor an advantage over other investors, since all known information is already factored into prices. Therefore, technical analysis, which is the idea that history repeats itself and therefore past stock prices can be used to predict future stock prices, cannot be used to help investors select undervalued stocks. EMH is linked to the idea of ​​a “random walk” ”. A random walk is a financial theory that holds that stock prices move in completely random ways (a random walk down Wall Street), and are therefore unpredictable. The logic behind the theory is that if the flow of information is unlimited and stock prices reflect all information without delay, then tomorrow's stock prices will be based solely on tomorrow's information regardless of today's price changes (a walk in the park random along Wall Street). The news itself is unpredictable and therefore leads to random price changes. As a result, because investors now all have access to the same information, they will receive the same return on their individual investments. There are three main forms of EMH, each consecutively stronger in implications, these include the weak form EMH, semi-strong form EMH and strong form EMH. The weak form is the least rigorous form and proposes that all historical data is already taken into account in the prices of investment securities (the balance). This therefore implies that technical analysis does not work. The semi-strong form EMH is a more stringent form that suggests that new information is immediately factored into security prices (the balance). The strong form EMH is the strictest form of EMH. As mentioned above, in this essay I will delve into the strong form EMH and discuss its validity. A strong form of efficiency is one in which stock prices are fully reflected by all available information, public, private and confidential (Nasdaq). This means that no group of investors should be able to consistently beat the market, so investors are unable to gain a competitive advantage over each other. When analyzing strong form efficiency, there are three different classes of investors that are important: corporate insiders, security analysts, and professional portfolio managers. Company insiders are administrators,owners of shares greater than 10% or senior officials. It is mandatory that once classified as a company insider, someone adheres to various strict rules and regulations set by the Securities and Exchange Commission (SEC) (TIP Ranks). Insider trading is the purchase or sale of an investment security by an individual who has access to non-public information about that security (Investopedia). The legality of the trade depends on when the trade takes place, if the information is not yet public at that time of the trade, then it is considered illegal insider trading. To prevent this from happening, the SEC has put in place some rules that all company insiders must follow. One of which is Section 16a of the Securities and Exchange ACT 1934 which states that whenever an insider trades in his own company's stock, he must file a Section 16(a) report with the SEC detailing the acquisition of the stock. These ratios can then be used by other investors to evaluate the profitability of the deal. This demonstrates exactly why corporate insiders are unable to make a profit because the more people have access to inside information about a deal, the more it depreciates in value and given that all the information is reflected in stock prices, the price of the shares would have already declined before the investor has the opportunity to make the trade. After company insiders, security analysts have the most information when trading. Although they do not have access to inside information, brokerage firms spend large amounts of time and money analyzing stocks to enable security analysts to provide reliable and trustworthy investment advice to their clients Womack (1996). Their recommendations on which stocks would be most profitable to buy and sell have a big impact on stock prices, proving that there are, indeed, returns on the costs of searching for information. This was demonstrated by Womack (1996) who found, through tests, that buy and sell recommendations made by security analysts had a significant effect on stock prices immediately and over a short period of time. It also found that larger brokerage firms are more likely to provide more credible recommendations and, in turn, will charge more. The most renowned security analysts have the greatest influence on prices, as their advice is considered more reliable. A professional portfolio manager is a person or group of people responsible for investing in common, closed-end or exchange-traded funds, implementing their investment strategy and overseeing the day-to-day trading of the portfolio (Investopedia). They are usually experienced traders, brokers or investors and generally have a direct impact on the fund's overall returns. However, according to Elton, Gruber, Das, and Hlavka (1993), test results showed that a fund's expenses were negatively related to fund performance. Fund expenses include investment advisory fees, so if it has been established through testing that fund expenses are negatively correlated with fund returns, this shows that investment advice is not particularly necessary. This therefore shows that, as it turns out, professional portfolio managers don't have much influence on the stock price after all. According to the strong form EMH, it should be impossible for an investor to profit from investor trading. However, in an article published by Nejat Seyhun (2000) there is information on all insider trading reported in all US companies.