What Is the Efficient Market Hypothesis?

By Jeremy Bowman – Updated Sep 14, 2025 at 3:30 PM EST

Key Points

Efficient market hypothesis posits stock prices reflect all known info, making market timing tough.
Critics argue market sentiment and future predictions also shape stock valuations, not just known info.
Adherents of the hypothesis favor index funds, believing any stock outperformance is largely random.

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Stock market numbers and arrows and lines. — Image source: Getty Images.

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Index Fund

A type of mutual fund or ETF designed to replicate the performance of a specific market index by holding a diversified portfolio of assets.

There's also debate over whether a price reflects all known information. Insiders, of course, have nonpublic information about companies, and although there are strict rules about sharing that information and about insider trading, it's fair to assume that at least some of that information leaks. After all, most insider trading isn't caught.

There's also information that comes from analyst research, which is available only to some, and there's information that a well-positioned casual observer might notice. Say, for example, you're a college student and you notice a particular beverage becoming suddenly popular on campus. That could provide an edge if you're an investor.

While most investors would agree that public information such as Securities and Exchange Commission (SEC) filings are reflected in stock prices, there are different types of information that may not be widely known.

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One key lesson from the efficient market hypothesis is that you're unlikely to gain an advantage in the market by finding information that isn't priced in. Instead, you're better off considering what the market is missing about a stock and what is misunderstood about the company's future.

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About the Author

Jeremy Bowman has been a contributing Motley Fool stock market analyst, covering technology, consumer goods, and macroeconomic trends since 2011. Before The Motley Fool, Jeremy was a newspaper reporter, restaurant manager, and English teacher abroad. He holds a bachelor’s degree in English from Colorado College and a master’s degree in business administration from American University. One of his Motley Fool headlines was briefly featured on Late Night with Stephen Colbert.

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