The Ethics Of Insider Trading

Investors rely on financial statements and information as it is very important to the decisions they make. When this information is leaked or used prior to its release to the general public, it can cause substantial changes in the pricing of a company’s stock. “Insider trading” is a term that is commonly known to investors, but what is insider trading? This term in most cases is references to illegal actions. However, the term speaks to both legal and illegal actions. According to the U.S. Securities and Exchange Commission (n.d.) (SEC), Insider trading as a legal action, addresses when corporate insiders-officers, directors, and employees-buy and sell stock in their own companies. In situations of legal insider trading, they are required to …show more content…
It is consider unethical because it gives an unfair advantage to the informed investor over other investors who are not privy to the same information and are not able to make the same decisions placing them at a higher risk of potential financial loss. Furthermore, these types of actions are unethical because the insider puts its own interests above those they owe fiduciary duties for the purpose of profits, this also allows for the potential of influence in the value of a company’s …show more content…
There are a number adverse consequences that can occur due to insider trading. It can dramatically reduce the trust and confidence that investors have in the system, the stock market’s operation as fair and efficient relies heavily on all inventors having the same access to information for companies that are publicly traded. An unfair advantage given to an investor who acts on inside information can cause other investors to lose trust in the market. This will then lead to the loss of confidence in the company, when considerable shifts in a company’s stock can be linked to public announcements, company performance and even the economy it is trusted. However, when a company’s stock fluctuates without any reason, like would might happen with insider trading, the investors may lose its confidence in the company and choose not to invest or buy its products which will hurt the company in the long run. There can also be an increase in the confusion and volatility, insider trading and cause major shifts in stock prices. If other investors notice this and possibly overreact to the shift it can have further effects causing more price change as so on. This action has the potential to spread to other stocks and even throughout the stock market