As someone who works with or adjacent to stocks, you have heard the term insider trading before. Even working in a big company that deals with stocks may expose you to this potential issue.
However, it is deeply misunderstood and in many cases, even people involved in trading do not realize or understand the full extent of why insider trading serves as a detriment. This applies not only to companies but to investors and even people who buy or sell shares like you.
What is insider trading?
The U.S. Securities and Exchange Commission explains insider trading in detail, starting with what it actually is. Insider trading occurs when someone with “inside information” uses or leaks that information, which they or others then use to get an advantage in the trade market.
As an example, imagine that you work in a major company and learn the company will soon file for bankruptcy. Needless to say, when this information goes public, stocks will tank. You may feel tempted to sell your stocks so you can avoid this loss, but you would have used inside information to predict the pattern of the market. Thus, it counts as insider trading.
Why is it detrimental?
But why is insider trading such a bad thing? The primary reason boils down to investors. Investors keep the entire stock market afloat, and their support and participation rely solely on trust and the honor system. Insider trading takes advantage of weaknesses in the system at the cost of fairness to other participants, thus proving that the market is unfair and untrustworthy. If investors begin to pull out due to this, the entire market can come crashing down.