Efficient market theory

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Efficient Market Theory

A controversial model on how markets work. It states that the market efficiently deals with all information on a given security and reflects it in the price immediately. The model holds that technical analysis, fundamental analysis, and any speculative investing based on them are useless. The model has three forms: weak efficiency, which holds that technical analysis is ineffective, semi-strong efficiency, which holds that fundamental analysis is ineffective, and strong efficiency, which states that even insider information is immediately reflected in the security prices. Investors and academics disagree on how well the model works.

Efficient market theory.

Proponents of the efficient market theory believe that a stock's current price accurately reflects what investors know about the stock.

They also maintain that you can't predict a stock's future price based on its past performance. Their conclusion, which is contested by other experts, is that it's not possible for an individual or institutional investor to outperform the market as a whole.

Index funds, which are designed to match, rather than beat, the performance of a particular market segment, are in part an outgrowth of efficient market theory.

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