Course 502: Efficient Market Theory
The Conclusions of Efficient Market Theory
In this course
1 Introduction
2 What Efficient Market Theory Is
3 The Conclusions of Efficient Market Theory
4 Strikes Against Efficient Markets Theory
5 The Upshot

Let's take an example. Company Asells at $53 per share. According to efficient market theory, that $53 price tag takes into account all factors that affect the stock, including the company's growth history up until that time, such as its profitability, the quality of its management, and what analysts were predicting the company would earn in the future.

Efficient-market theorists don't claim that any one investor thinks about all these things when buying stocks. Maybe some investors bought Company A because they liked what management said in its latest earnings release, or because they liked the company's products. But the activity of all investors, which is what actually drives the stock's price, collectively reflects all of those factors.

What's the practical application of this theory? Because the market is efficient, with prices moving so quickly as new information comes out about a company, no one can consistently buy and sell quickly enough to benefit from the information. As a result, neither you nor professional money managers can beat the market for an extended period of time. Instead of trying to beat the market, say efficient market theory's supporters, you should just index, or buy and hold all the stocks in the market.

Next: Strikes Against Efficient Markets Theory >>

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