Efficient market theory
Also found in: Dictionary, Medical, Acronyms, Encyclopedia.
Efficient Market Theory
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.