Therefore, it follows that investors cannot ‘beat’ the market by buying undervalued stocks or selling inflated prices. Information cannot be predicted by the general public, as proponents of the hypothesis say that the market is random. If prices move according to public information, they occur efficiently (in a timely manner), which means that stocks are trading at their ‘fair’ price. The efficient market hypothesis suggests that there is a direct relationship between news (or information) and prices, as buyers and sellers generally have access to the same information. If an investor hears bad news about a corporation, they might sell their stocks, therefore lowering the stock price. This is because if an investor hears good news about a corporation, they will likely go buy stocks of this corporation, thus driving up the stock price. At its simplest level, stock prices will change based on positive or negative information about the corporation to which they belong.

In order to better understand the efficient market hypothesis, it is first important to understand basic stock investing. 2 The efficient market hypothesis is part of liberal economic thought, as it follows neoliberal thought of the efficient free-market that does not require any intervention.

1 This means that if you are investing in assets based on public information, it is impossible to outperform the market over time, because buyers and sellers are working with this same information. The efficient market hypothesis is an economic theory which stipulates that the prices of traded assets, like stocks, reflect all the publicly available information of the market.

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