Noise Trading

The efficient-market hypothesis (or EMH) says, in essence, that financial market prices (like the price of stocks listed on a stock market) will tend to be accurate reflections of the value of those listed assets because buyers are able to access and consider all available information about them.

Thus, according to this theory, at least, if a share of Stock A is selling for $5, that price lines up with the actual value of a portion of that company (based on the number of shares available) because stock market participants have access to all their financial information and all news about the companies in question, and it would be irrational for them to buy a share of that stock for $6 if it isn’t worth that much (while shares sold for $4 would be snapped up immediately, in time raising the price up to the neutral position of $5).

The implication of this theory is that it’s not really possible to “beat the market” in a consistent way, because all information is already known by everyone involved (or enough of them, at least) that it’s difficult to legally know something (which might influence that price in the future) one’s competition does not also know.