The Efficient Market Theory

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By Selena Maranjian (TMF Selena)
February 21, 2003

Q. What's the "efficient market theory"?

A. It's a theory suggesting that all available information about a stock is known and factored into its price. Thus, an investor shouldn't be able to find undervalued or overvalued stocks. There are strong and weak forms of the theory, and it's not embraced by all. Many Fools tend to think that the market is generally efficient, but there are still occasional pockets of inefficiency that an alert investor can take advantage of.

Here's a Post of the Day from our discussion boards that addresses "EMT" and an article that addresses "Bubbles and Stock Inflation." Bill Mann hammered at EMT in this article, as did this other Post of the Day.

To learn more about investing Foolishly, visit our Fool's School. Or check out some of our inexpensive and well-regarded online how-to guides (which feature money-back guarantees). You can also learn all about brokerages and find one that's right for you in our Discount Broker Center. 

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This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.