Efficient Market Hypothesis

• The efficient market hypothesis is a classic economic theory that seeks to explain the activity of the market. According to this understanding, the stock market is the most efficient processor of all public information. For this reason it should be impossible for any single investor to consistently beat average market returns. The way around this is if an investor has insider information that would give him an unfair advantage and interfere with proper market functioning.
  
  

Insider Information

• Insider information is knowledge that should only be known by company insiders. For instance, if an employee knew of a new drug a company was about to release that would boost its profits and stock price, the use of information of this kind in the stock market is explicitly illegal and considered one of the highest ethical breaches. The use of insider information interferes with the efficiency of the market and its trustworthiness.
  
  

Full Disclosure

• For investors to make accurate assessments of a company's profits and prospects, it is necessary that they possess all pertinent financial data. Stock exchanges have certain rules for what companies are required to disclose. Some of the most serious ethical breaches in stock market history have occurred when companies falsified their data or illegally withheld it. This kind of breach interferes with the market's ability to be an accurate gauge of stock value.
  
  

Mistrust

• If investors have reason to fear that they will be disadvantaged by insider trading or lack of full disclosure, they will be less likely to invest in the stock market. This will lower the prices at which stocks are sold and depress the market. For a market to function at a maximum of efficiency and for it to attract the maximum investment, it must first establish a strong set of ethics.