Efficient Market Theory

Definition - What does Efficient Market Theory mean?

Efficient Market Theory is a theory that states that the market operates and processes information efficiently and prices in all information as soon as it becomes known.

Testopedia explains Efficient Market Theory

The efficient market theory takes three forms the weak, semi strong and strong form of the theory.

Weak-form efficiency
- states that the future price of a security can not be predicted by studying the past price performance of the security. This form of the theory believes that technical analysis can not produce excess returns.

Semi-strong form efficiency – states that the market price of a security adjusts too rapidly to newly available information to achieve an excess return by trading on that information.

Strong-form efficiency – states that the current price of a security reflects all information known and unknown to the public and there is no opportunity to earn excess returns.

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