Efficient market hypothesis
TheoryDefinition
The theory, developed by economist Eugene Fama in the 1960s, that stock prices already reflect all available information. If true, it means you cannot beat the market by picking stocks or timing trades, because every known fact is already in the price. This is the intellectual foundation for index investing.
The theory has three flavors. 'Weak' form: past prices are already in. 'Semi-strong' form: all public information is in. 'Strong' form: even insider information is in. Most evidence supports weak and semi-strong. Critics (including Buffett) argue markets have persistent inefficiencies. The truth is probably in between.
The theory has three flavors. 'Weak' form: past prices are already in. 'Semi-strong' form: all public information is in. 'Strong' form: even insider information is in. Most evidence supports weak and semi-strong. Critics (including Buffett) argue markets have persistent inefficiencies. The truth is probably in between.
Example
A company reports blowout earnings 20% above expectations at 4:30 PM. By the time the market opens the next morning, the stock has already jumped to fully reflect the news. You cannot profit by buying at the open unless the market is wrong about what the news means.