TheEffects of Insider Trading
TheEffects of Insider Trading
Acorporate executive exits a board meeting and calls their associate.They go ahead and share confidential share price not yet publicizedby the company. As expected with this confidential information theywill be able to act appropriately for better gains or loss avoidance.A similar case was witnessed in the Wall Street. The authorities werepursuing a few suspects due to a financial crisis. The policebelieved they were behind the crisis. Behind the curtains someoneelse was. These are the insider traders. They form the crème of thecompany and are way above in the corporate ladder. They have all thecompany privy information. Insider trading has far reachingconsequences in any share or stock exchange market (Bainbridge &Stephen, 2002).
Obviously,the government is against insider trading. But the backlog ofunsolved cases of culprits in insider trading is thieves-thick. Thegovernment is always promising of plans that are underway to solvethe insider trading. Different efforts need to be in place if thetrade is going to be meted out. But to a much bigger avail, insidertrading is impossible for the government to curb and it has been seenbeneficial to markets. The insider information eventually comes outto the public regardless of the pace. On a positive note, the insidertrading lets the market be prepared and act reasonably. Wheninformation leaks out it makes it recipients act in the best way inresponse (Bainbridge & Stephen, 2002).
Moreover,insider trading cannot be said to be a crime. This is because crimehas victims. Insider trading is the power of information trending andmoving decisions. Trending information benefits all the playersincluding the average investors. A market without a free flow ofinformation is blind and headed for destruction. To the insidertraders, the returns are as numerous. They can easily borrow moneyand repay when the prices fall. This would make them pay less in realmoney terms. The insider trader can equally initiate variouscost-cutting changes and introduce new changes for the safety oftheir shares (Khanna, 1997).
Therenever exists a fully merited venture. Insider trading equally hassome demerits to its credit. One of its major drawbacks is thedecreased public confidence it creates. The public views itself aspuppets at the whims of the traders. This may lead them to pull out.An effect of pulling out of a market creates a smaller market. As weknow, a small market has no strength to speak out and challengebigger markets. If by any chance the confidence decreases, it wouldlead to an eventual collapse of the market. Additionally, there isthe issue of insider predation. It instils fear in the investors andthe market specialists (Khanna, 1997).
Informationis a scarce result and yet very difficult to curtail. No known rulecan sufficiently control the flow of information, however, stringent.Then the information brings power and freedom of decisions. Withinformation comes liberty and responsibility. What may be unnecessaryto one company in terms of insider trading may be unacceptable byanother. Differences such as this make it hard to have a solid andconclusive resolve in the matter. Each company should employ its ownrules to deal with insider trading in its own capacity. This wouldmean it employs contractual rules to its employees. In this way, theemployees would be able to evaluate their options and decide wisely(Bainbridge & Stephen, 2002).
Bainbridge,Stephen M. (2002). CorporationLaw and Economics.New York: Foundation Press.
Carlton,Dennis W., and Daniel R. Fischel. (1983). "The Regulation ofInsiderr Trading." StanfordLaw Review35