Efficient Market Hypothesis

In finance, the efficient market hypothesis (EMH) asserts that financial markets are "efficient", or that prices on traded assets, e.g. stock prices, already reflect all known information and therefore are accurate in the sense that they reflect the collective beliefs of all investors about future prospects. The efficient market hypothesis implies that it is not possible to consistently outperform the market - appropriately adjusted for risk - by using any information that the market already knows, except through luck or obtaining and trading on inside information. It further suggests that the future flow of news (that which will determine future stock prices) is random and unknowable in the present. The EMH is the central part of Efficient market theory (EMT).

It is a common misconception that EMH requires that investors behave rationally. This is not in fact the case. EMH allows that when faced with new information, some investors may overreact and some may underreact. All that is required by the EMH is that investors' reactions be random enough that the net effect on market prices cannot be reliably exploited to make an abnormal profit. Under EMH, the market may, in fact, behave irrationally for a long period of time. Crashes, bubbles and depressions are all consistent with efficient market hypothesis, so long as this irrational behavior is not predictable or exploitable.

There are three common forms in which the efficient market hypothesis is commonly stated - weak form efficiency, semi-strong form efficiency and strong form efficiency, each of which have different implications for how markets work.

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(From Wikipedia)