Disadvantages Of Insider Trading

Not only will individual investors stop participating in the market, but money managers may also leave. Their research would not be as needed if individuals can simply watch stock prices to gauge where the market is headed. Some money managers produce a large amount of research on certain firms, using data from the government or private institutions that is available to the public. This information and research helps to accurately price stocks. If insider trading was legal, the work and research done by money managers might not be worth it when they are completing with insiders who are able to obtain information more easily. The problem with investors and money managers leaving the market is that it reduces liquidity since there will be less …show more content…
Although there is no way to forecast what investors will do in reaction to legalizing insider trading, their perceived disadvantage is actually not fully correct. There are really no victims due to insider trading and it can actually assist in helping others minimize their losses. For example, an outside individual is planning on buying a certain stock. They have done their research, found all the information that’s publicly available to them, and made the decision to buy. Someone else, who is an insider, knows more information than the individual interested in buying. This insider knows that the firm is involved with fraud and wants to sell their shares quickly. So they make a trade transaction and both parties received what they wanted. The fraud is publicized a week later, the stock plummets, and I lose all my money. The person I traded with did not lose anything. To most people, and those who are against insider trading, it seems that the outside individual was the victim in scenario. Contrary to this belief, the inside trader actually helped to decrease the other person’s losses. No matter what the insider knew, the individual investor still did their own …show more content…
Insiders may easily be able to predict the outcome of some scenarios such as a negative decision being made in the future. But in most cases, even if you know the information, you do not know how others in the market will react to it. In the example of OPK’s failed drug trial, even if you knew before the public that they were not going to pass inspection, nobody knew how other investors were going to react. Some became skeptical and sold their shares, while others took it as a buy opportunity to obtain more shares. Even in the case of merger announcements, the stock price may increase or decrease, depending on expectations. The market is unpredictable and insider information only gives one side. What it does not tell you is how other participants are going to react. Maybe investors will leave the market, but maybe the will not. It is all a matter of others’ expectations and how they will react. Individuals can use their observations of potential insider trading activity to enhance their research and make more informed decisions, rather than simply leaving the