Effects of Illegal Insider Trading Essay

748 Words3 Pages
"Insider trading" is a term that most investors have heard and usually associate with illegal conduct. But the term actually includes both legal and illegal conduct. The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the SEC. Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities…show more content…
But, in a case like that of Enron, their stock price was enormous since it was not evident that they were cooking their books. This would not have happened if insider trading were legal. Investors would not have lost most of their money investing in a firm like Enron and taking the hit when they were investigated for insider trading and fraud. The Enron insiders would have sold their shares and the price would have corrected itself and the disaster might have been avoided. Investors could have allocated their money towards more promising investments, which in turn would increase market efficiency. With legalizing insider trading, stock prices would be more efficient with the ability to acquire more information. Illegal trading is still common and some may say it is actually growing. This puts law-abiding investors at a disadvantage. Insider trading bans allow for some comparable behavior. For example, if I were to work for a company and hear that we were going to post a profit this quarter, I would not sell my shares. This could be considered insider non-trading and is currently legal, but can basically be considered insider trading. There are plenty of loopholes in the current system. With increased information, we might be able to smooth the volatility of the market. It will lessen the exposure to bad information and will benefit the market’s participants. Profits being made from the information will expedite the flow of information. There is a gray area
Get Access