Insider trading is defined as the trading of a corporations stock by people who may know information about the company that is not public knowledge. Insider trading is when a person who worked for a corporation uses nonpublic material information to sell or gain stocks for their own personal gain. Material information is any information that, if released, could affect the corporation’s stock price. An insider is any person who is privy to material information about a company before it is made public. This includes people such as CEO’s executives and directors. It also extends to people that have a relationship with these people such as spouses, siblings, parents or children. In most countries insider trading is illegal and carries legal penalties.
Why Is Insider Trading Illegal?
Insider trading is illegal because it creates an unfair playing field. The investor market works on a concept of transparency. This means that all the information that is needed to make a sound financial decision is made public knowledge. People who are not part of the company are made aware of important factors at the same time. This gives everyone a fair chance to evaluate the information and decide whether or not to purchase shares in a corporation. Insider trading upsets this principle as “insiders” use knowledge that the general public is not privy too, to make decisions about their investments. If insider trading was legal it would undermine the confidence of investors and people may stop investing in the stock market. People would feel that the stock market was rigged to ensure that employees of large corporations benefit the most. There would then be no point in being a private investor as you would not get a fair deal. People not willing to invest would cause a huge downturn in the capital economy. It is also said to cause a n increase in the cost of capital for securities issuers, which directly effects economic growth.