Effects of Insider Trading in the Stock Market
Illegal insider trading is the buying or selling of an investment based on information not generally available to the investing public. Officers of companies often buy and sell stock in their company. While this is technically insider trading, it is not illegal in of itself. Insider trading has the potential to manipulate stock prices to the harm of the investing public and to make insiders considerable profits based on unfair access to information about the company.
Significance of Insider Trading
Insider trading undermines the integrity of the investing system and therefore discourages non-insiders from investing unless they believe they are on something approaching the same footing as insiders who are investing. Allowing insider trading to go unchecked would reduce the number of investors willing to invest capital and therefore could potentially harm the economy as a whole.
Identification of Insider Trading
Illegal insider trading can be conducted by people who are not employed by the company in question. For example, someone who is given a tip by a friend who works in the company in question could be guilty of illegal insider trading. Because the reach of people who could potentially invest based on information not generally available to the public is broad, it can be difficult to identify insider trading, especially small scale investments.
SEC disclosure requirements and insider trading
The SEC has a full disclosure requirement (SEC Regulation FD) intended to mitigate the potential for illegal insider trading. Regulation FD requires that a company make a public disclosure of material information anytime that material information becomes available to stock analysts or holders of the issuer's securities who might rely on that information in investing decisions. The net effect of Regulation FD is to put all investors on the same footing in making investing decisions.
Potential Benefits from Insider Trading
There is a small school of thought that contends illegal insider trading may actually benefit the market. The theory contends the insider trading accelerates the pace at which new information is used to adjust the price of the stock and therefore brings it to its "proper" level more quickly. Similarly, there are those who contend that individuals who sell stock to an insider illegally relying on insider information still benefits because he is selling the stock at a price that he views as a fair profit.
Famous Examples of Insider Trading
Martha Stewart provides probably the most famous example of insider trading in recent history. Ms. Stewart had owned shares in ImClone. A day before an ImClone drug was denied approval by the Food and Drug Administration, she sold her shares. The next day the shares plummeted. Ms. Stewart was accused of receiving insider information from an ImClone executive and relying on that information to sell the stock. Ultimately, Ms. Stewart spent five months in prison, five months on house arrest and two years on probation.
Significance of Insider Trading
Insider trading undermines the integrity of the investing system and therefore discourages non-insiders from investing unless they believe they are on something approaching the same footing as insiders who are investing. Allowing insider trading to go unchecked would reduce the number of investors willing to invest capital and therefore could potentially harm the economy as a whole.
Identification of Insider Trading
Illegal insider trading can be conducted by people who are not employed by the company in question. For example, someone who is given a tip by a friend who works in the company in question could be guilty of illegal insider trading. Because the reach of people who could potentially invest based on information not generally available to the public is broad, it can be difficult to identify insider trading, especially small scale investments.
SEC disclosure requirements and insider trading
The SEC has a full disclosure requirement (SEC Regulation FD) intended to mitigate the potential for illegal insider trading. Regulation FD requires that a company make a public disclosure of material information anytime that material information becomes available to stock analysts or holders of the issuer's securities who might rely on that information in investing decisions. The net effect of Regulation FD is to put all investors on the same footing in making investing decisions.
Potential Benefits from Insider Trading
There is a small school of thought that contends illegal insider trading may actually benefit the market. The theory contends the insider trading accelerates the pace at which new information is used to adjust the price of the stock and therefore brings it to its "proper" level more quickly. Similarly, there are those who contend that individuals who sell stock to an insider illegally relying on insider information still benefits because he is selling the stock at a price that he views as a fair profit.
Famous Examples of Insider Trading
Martha Stewart provides probably the most famous example of insider trading in recent history. Ms. Stewart had owned shares in ImClone. A day before an ImClone drug was denied approval by the Food and Drug Administration, she sold her shares. The next day the shares plummeted. Ms. Stewart was accused of receiving insider information from an ImClone executive and relying on that information to sell the stock. Ultimately, Ms. Stewart spent five months in prison, five months on house arrest and two years on probation.
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