Why is insider trading unhealthy for the market?

Why is insider trading unhealthy for the market?

On Behalf of | Dec 16, 2021 | White Collar Crimes |

Everyone wants to indulge and trade in a healthy marketplace, no matter what type of wares it sells. This also applies to the stock market. In fact, health is of crucial importance in stock trades for various reasons.

Because of the importance of its health, any activity that risks this health constitutes as something to avoid. This includes insider trading.

Surprising examples of insider trading

The U.S. Securities and Exchange Commission discusses insider trading. It is a somewhat common but still illegal activity that involves using “inside information” to get a leg up on the competition in the market.

For example, say you work for a company that has had internal financial struggles lately. Most likely, this information has not fully leaked to the public yet. Then, one day, you catch wind from some higher-ups that the head of the company will soon file for bankruptcy. Based on this knowledge, you sell your stocks, knowing the value will soon tank.

This is insider trading. You used information that only employees of the company would know in order to get an unfair advantage against other buyers and sellers in the market.

The problem behind insider trading

Why is this such a big deal, exactly? Simply put, it threatens the integrity of the entire market. If one person uses their unfair advantages to beat out the competition, what guarantee do investors have that they will not end up suffering the same fate? This makes them less likely to invest, and a lack of investors can actually jeopardize the entire flow of the market.

Thus, you want to avoid doing anything that invokes insider trading. This even includes sharing your information with relatives, who may end up using it to cheat the market, too.