Efficient market hypothesis

The efficient market hypothesis states that the markets always incorporate all information, so it is impossible to beat the market. Thus, an investor would not be able to earn a profit through the judicious selection of stocks or by timing the purchase or sale of securities. Instead, the only way to earn an outsized profit would be to trade riskier securities. A logical outcome of this theory is that one can generate reasonable returns simply by investing in a passive portfolio that carries a low overhead cost.

The efficient market hypothesis has many detractors, since a number of investors have been able to beat the market rate of return over long periods of time. Also, sudden changes in the market indicate that the market is not efficiently incorporating new information.