Final answer:
According to the Efficient Market Hypothesis (EMH), stock prices reflect all known information and the best estimate of a stock's intrinsic value at any given time.
Step-by-step explanation:
If you believe in the Efficient Market Hypothesis (EMH), you believe that stock prices reflect all available information, including the current supply and demand in the market, past company performance, and future projections. According to EMH, stock prices change in response to new, unexpected information, as the market quickly assimilates this information. Therefore, EMH suggests that stock prices at any given time represent the best available estimate of the intrinsic value of a stock. This doesn't mean that prices reflect the emotions and sentiments of investors; rather, they reflect rational expectations based on all known information. Additionally, anticipating shifts in stock prices successfully means finding companies that are currently undervalued by the market but are poised to do well in the future. One implication of EMH is that trying to predict which stock prices will rise based on future profits is flawed because future news affecting a company's performance is unpredictable. Financial analysts and investors work continuously to find undervalued stocks—those that the market doesn't yet fully appreciate but may in the future. Still, because market-changing news is inherently unpredictable, stock prices tend to follow a random walk with a trend; despite fluctuations, they tend to gradually increase over time.