Understanding The Efficient Market Hypothesis

The buying and selling of stocks is a lucrative global business in its own right. There is a lot of money to be made in this business and millions of people across the globe make a full time living from just buying and selling stocks. In some countries, the stock market is regulated by the Securities and Exchange Commission. In other parts of the world, the stock market may be regulated by the stock exchanges of those countries. This is done to protect the investor. The strange thing is that in some ways, the market actually regulates itself.

One popular self-regulating mechanism of the stock market is the Efficient Market Hypothesis. The EMH states that stocks always trade on their own fair value. This implies that it is very difficult for investors to buy grossly undervalued stocks. It also implies that it is not possible for speculators to buy sell stocks at grossly inflated prices. This hypothesis is a popular one and many people believe it.  Many people believe that this hypothesis does not reflect the reality of what one might in the world of stock market investing.

There is a bit of a controversy here because both camps have good reasons to believe or doubt the Efficient Market Hypothesis. Generally, it is true that most stocks experience slight appreciation and slight reduction in prices daily. In some cases, stock prices may remain stable over a period of days or weeks. In most countries, if stock prices suddenly go up or down by high margins, this will be investigated by the regulatory agency in that country.

Having said this, it has to be admitted that it is possible to beat the stock market consistently with the right investment ideas. Investors who apply the right investment tips can also out-perform the market consistently. People who invest in the stock market study the trend and they can make reasonable predictions on stock prices. They may not always be right but they can use their knowledge to make money.

Finally, the stock market does not always obey the Efficient Market Hypothesis. During a stock market crash, prices will fall sharply. Prices may also rise suddenly based on information and the prospects of some public companies.