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Why is insider trading frowned upon?

On Behalf of | Aug 11, 2022 | Uncategorized

Insider trading generally has a bad reputation in and outside of white-collar jobs. Most people know not to engage in it.

But how many people know exactly why they should not take part? What about insider trading makes it so frowned upon in the working world?

Defining insider trading

The Conversation takes a look at insider trading and the problems it poses. First, it is important to understand what insider trading is.

In essence, a person uses the information that they had exclusive access to as someone within an industry, which the general public does not know about. They then use this information to make moves on the market, such as buying or selling stocks. An example includes hearing that a company will soon file for bankruptcy, and then selling stocks before they make that public announcement.

Insider trading also extends to information given or even sold to other parties, too. This includes family or friends of the person who learns the information.

Why should you avoid engaging?

So why is this bad, then? It sounds like a good set-up for the people who get the information, after all. However, it is a very unfair situation for the general public and anyone who does not have access to that same well of information.

Thus, it creates an unfair environment in which trading happens, which in turn can destroy the trust of investors. They generally invest with the notion that the market is not influenced by unfair advantages or disadvantages, and insider trading destroys that trust. Thus, it can potentially affect every single person involved in stock market trading, especially if insider trading were to grow more prominent. This is why people convicted face such heavy penalties.