Published 11 Apr 2017
When people hear of the term insider trading, they’ll normally associate that with criminal activities. The United States Securities and Trade Commission clarifies that there are two kinds of insider trading: the legal and the illegal trading.
The SEC defines legal insider trading as the buying and selling of company stocks by their own directors, executives and employees.These transactions are reported in filings with the securities regulator using designated forms. Informing the SEC is synonymous to informing the public of the transactions, making them above board.
Meanwhile, insider trading has its shady side. It becomes illegal when directors, officers or employees buy and sell stocks using information that are not available to the investing public. By exploiting their access to strategic information, these company employees are being unfair to investors. They are acting out of self-interest instead of in the interest of their shareholders. By doing this, these insider traders are breaching their fiduciary duties and the trust of the public and their shareholders. Illegal insider trading could also mean giving out relevant information to people outside the company who will use the data to enrich themselves. As an example, a company chief executive officer knows that a certain company is going to be taken over. This information is kept confidential. Because the CEO knew about the upcoming bid, he purchased shares on that company knowing that the price of its public shares will experience a gain.
Instances of insider trading cases that have been filed with the SEC are those brought against:
friends, associates, and family members of directors, officers and employees who received confidential securities information who used the tip to trade; and brokerage firm employees who knew of classified information yet they traded securities acting upon that information.
Insider trading may cross the line and become a crime once it serves to cheat the public of information that would affect their investing decisions. In some ways, it is like stealing from the public an equal opportunity to information. The SEC has made it a requirement for public companies to make full disclosures of material public information. Such information should not be the sole property of the top management.Once a company unintentionally discloses sensitive information to one person, the securities law requires the company to inform the public about the same information right away.A breach of this law can eventually lead to charges of insider trading. Also, insider trading laws are enforced strictly in the country to avoid undermining the investing public’s trust in the integrity and equitability of the trading markets.
Although some claims that insider trading has no victims, others argue that like any other crime, this practice has its victims. The very first set of victims is the shareholders of the company where information has been stolen or wrongly used. An insider trading can sometimes result to stock price declines or price hikes, affecting the market value of a company.
Although the shareholders are directly affected, there are others who will also be adversely affected by this fraudulent securities act.For instance, if the insider were employed by a different company, then, that company’s reputation would be tarnished, affecting its relationship with its clients.
Lastly, insider trading could harm a particular market. Say for instance that insider trading is permitted in the New York Stock Exchange. As a consequence, many investors would lose confidence in that particular stock market.Once trust is lost, it will result to lower liquidity and less capital for companies who need fresh funding.
Sternberg, Elaine. ‘Insider Trading’Business Ethics in Action. Oxford: Oxford University Press, 2000. 11 June 2008
‘Insider Trading.’ 19 April 2001.