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Finance Glossary

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Efficient Market Theory

Definition:

The theory says that you can't beat Mr. Market, that markets are in fact efficient and that new information pukes out into the marketplace like a burp in a small room. Everybody gets wind of it and digests it and reacts. The consequence of the efficient market theory is that all information is already reflected in the stock price, so you can't earn more than the market average returns from analysis or past price performance. In the "strong form" model, even insider information is said to already be reflected in the market price. Evidence, however, suggests that there is some validity that in the "strong form" markets are not efficient as insiders can (and do) earn higher-than-average returns from trading their companies' stock.

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