It seems perfectly natural and innocuous that those with the most information would want to profit from it, and doing so isn’t illegal anywhere else. So why is it prohibited to make trades based on information not everyone has? What undesirable thing does this prevent?
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When you buy a stock, you are literally buying it, from someone else. When you sell it, you are selling it to someone else.
Insiders have knowledge and are often involved in the decisions that make a stock worth more or less. Using that knowledge they can take advantage of people.
An analogy should make it easier to understand. Imagine, for instance, that a politician knew he was going to order a railroad to go through a specific neighborhood – but he owns a house there that is going to become worthless. So one day, he goes to your sweet retired grandmother and sells her the house for $100k. Then the next day he announces the railway and your grandmother now owns a worthless house. For all intents and purposes, he stole $100k from your granny. Does that seem honest and fair?
It is not however, only the unfairness which is at issue. Our politician could, on day three, realize he just made $100k, and decide to do it again – and eventually, instead of trying to run things well and efficiently, he is trying to run things to milk little old ladies out of their savings.
The point is – for the economy to work, we need business to try to make profits by being more efficient, more productive or more creative. We don’t want all their energy spent trying to trick stockholders into paying too much for stock – that will just make us all poorer.
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