Hello everyone, It is a well-known fact that in the stock market one loses and the other gets rich. However, there are situations in which traders make profits in a fraudulent and illegal way. We are talking here about insider trading. Today I am going to explain what is insider trading and why it is illegal.
What is Insider Trading
In simple words, it is conducting transactions most often on the capital market, i.e. with the use of shares of listed companies, which were made on the basis of confidential information, i.e. information that was not available to all market participants at the same time. This is usually a person who is in a partnership or has a close relationship with such persons. Generally speaking, these are persons who have direct or indirect access to confidential information on the financial situation of the company.
Confidential information to your advantage
There are many insider trading patterns but one of the most obvious is one based on prior access to the information contained in a company's financial statements. The date of publication of such a report is known many months in advance, of course, but traders do not know what values will be included in this report. Prior access to such confidential information is usually given to at least some members of the management board, employees responsible for its preparation, and sometimes to people who audit such statements. Such classical insider trading is a situation when a person from inside the company, knowing before the publication of the report that the financial results will be much worse than expected, starts to sell his/her shares expecting that after the report is published, the market will react with strong drops. Of course, insider trading is not only about using inside information from financial statements that have not yet been published, but also about all events in a company that may have a key impact on the price of its shares. These may be new contracts, new agreements, or new regulatory decisions of various supervisory institutions that will affect the activity of a specific company.
Legal Instances of Insider Trading
The term "insider trading" generally has a negative overtone. Legal insider trading happens in the stock market on a weekly basis. The SEC requires transactions to be submitted in a timely manner. Transactions are submitted electronically to the SEC and also must be revealed on the company’s website.
Is insider trading morally wrong?
Insider trading is unethical and illegal. There is a moral problem in insider trading that is rooted in fairness. Immature markets are dominated by insider trading. But in mature markets, as long as there are people who care about fairness, you can expect to see insider trading prohibitions enforced.
Hope you found today’s article helpful. If you want to learn more about trading follow me at @fizzonmyjayyce. Have a nice day :)
