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Efficient market hypothesis

The efficient market hypothesis or efficient market theory states that stock prices perfectly reflect all market information that is known by all investors.

Expanded Definition

The theory also states that no investor can beat the market's returns through skill because it is impossible to determine future stock prices, and that luck explains why some investors beat the market. The theory is much debated.

The logic is that:

  • No self-interested buyer would be willing to pay more than a company is worth.
  • No self-interested seller would be willing to accept less than a company is worth.
  • Therefore, the only prices at which companies will trade must be fair prices.

However, a skilled investor who can correctly anticipate the future prospects of certain companies can do better than average.

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