Insider Trading

287 views

I don’t really get it. Wouldn’t you want to buy and trade your own company’s stocks? Why is it illegal? Am I just not understanding what insider trading actually is?

In: Economics

Insider trading is using knowledge not available to the general public to buy or sell shares when you know that when the information is released to the public will cause the price to change.

You can buy your own company’s stock, just just have extra rules in place to insure you don’t do so when you have access to material (significant impact on business and stock) information others don’t.

Companies typically place quiet periods where employees and board members cannot trade, such as period between close of quarter and earning release, or before a major merger/acquisition is announced, major new product is unveiled, or when a major regulatory/legal ruling is about to come down.

Employees often buy through an employee stock purchase plan, where parts of each paycheck are set aside and then shares are bought for employee at set intervals (typically quarterly). But they can buy on ad-hoc basis, as long as not a quiet period. Similarly, top level execs will often sell shares on a regular planned basis, eg. sell 5000 shares quarterly on Friday after earning release, because such regular trades are easier to show as pre-determined and not as a result of illegal insider knowledge.

The crime of insider trading is specifically regarding trading on material information not known to the public.

Insider Trading is illegal because it make uses of information the public doesn’t know.

one of the core aspects that makes the Stock market ” Fair” is that all players are operating on public knowledge about the companies hence everyone is working off the same base and any edge you can get should be coming from your ability to read how a market is progressing and making your educated guess based off this info.

this is where insider Trading is a problem, if you got privileged information that the public is not supposed to know you can get ahead of the market and potentially make a lot of money…**at the expense of everyone else that is participating in this market**, this is VERY illegal as it completely undermines trust in the Stock market and makes it pointless.

Most companies do allow their employees to buy their own stock(they generally even put aside a % of the stock for this purpose alone), but they also must enforce rules that prevent them from accidentally or not would let them act based on insider knowledge(ie not allowing transactions during sensitive periods and enforcing NDA’s to prevent insider trading in the 3rd person.)