What is the 'Efficient Market Hypothesis - EMH'

The efficient market hypothesis (EMH) is an investment theory that states it is impossible to
"beat the market" because stock market efficiency causes existing share prices to always
incorporate and reflect all relevant information. According to the EMH, stocks always trade at
their fair value on stock exchanges, making it impossible for investors to either purchase
undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to
outperform the overall market through expert stock selection or market timing, and the only way
an investor can possibly obtain higher returns is by purchasing riskier investments.

BREAKING DOWN 'Efficient Market Hypothesis - EMH'

Although it is a cornerstone of modern financial theory, the EMH is highly controversial and
often disputed. Believers argue it is pointless to search for undervalued stocks or to try to predict
trends in the market through either fundamental or technical analysis.
While academics point to a large body of evidence in support of EMH, an equal amount of
dissension also exists. For example, investors such as Warren Buffett have consistently beaten
the market over long periods of time, which by definition is impossible according to the EMH.
Detractors of the EMH also point to events such as the 1987 stock market crash, when the Dow
Jones Industrial Average (DJIA) fell by over 20% in a single day, as evidence that stock prices
can seriously deviate from their fair values.

A stock index or stock market index is a measurement of the value of a section of the stock
market. It is computed from the prices of selected stocks (typically a weighted average). It is a
tool used by investors and financial managers to describe the market, and to compare the return
on specific investments.
An index is a mathematical construct, so it may not be invested in directly. But many mutual
funds and exchange-traded funds attempt to "track" an index (see index fund), and those funds
that do not may be judged against those that do.

What is an 'Income Bond'

An income bond is a type of debt security in which only the face value of the bond is promised to
be paid to the investor, with any coupon payments being paid only if the issuing company has
enough earnings to pay for the coupon payment.

BREAKING DOWN 'Income Bond'

The income bond is a somewhat rare financial instrument which generally serves a corporate
purpose similar to that of preferred shares. It may be structured so that unpaid interest payments
accumulate and become due upon maturity of the bond issue, but this is usually not the case; as
such, it can be a useful tool to help a corporation avoid bankruptcy during times of poor financial
health or ongoing reorganization.
What Are Stocks?

Stocks, or shares, are units of equity or ownership stake in a company. The value of a
company is the total value of all outstanding stock of the company. The price of a share is simply
the value of the company also called market capitalization, or market cap divided by the
number of shares outstanding.
What Are Bonds?

Bonds are simply loans made to an organization. They are a form of debt and appear as liabilities
in the organization's balance sheet. While stocks are usually offered only in for-profit
corporations, any organization can issue bonds. Indeed, the governments of United States and
Japan are among the largest issuers of bonds. Bonds are also traded on exchanges but often have
a lower volume of transactions than stocks.