Question: When I first began trading in stocks and shares, I was always worried about whether i was reading the market right or not. There were days when I made it big and others when I was not doing so well. This was when I read about inside trading, but then when discussing the same with a friend, he mentioned that Insider Trading was Illegal. I wondered why. In fact, if a person has inside knowledge, it is an added advantage and this made me wonder why it was illegal. Could someone explain the concept of why is Insider Trading Illegal in United States? Thank You!
Information on why Insider Trading is illegal and Ban in United States
Answer: While on one hand what you are saying is right, Insider trading is not right. It is illegal simply because the insider should not be given permission to trade as they end up earning more than other traders. Information is valuable and important, however when it comes to stock trading, everyone should have the same advantage, and privy to same kind of information, whatever it might be. There are places where art, real estate stocks are bought by people who are familiar with the industry, and they make profit from the same. People who are new to the arena might be slow, or hesitant. This when used across the industries is a legal action, but not when someone has information that others are not aware of but which would help them increase their profits.
Insider trading has the ability to undermine the confidence in all the securities market. The minute you come to know that someone is an insider and will be benefiting from the trade, increasing their earnings, you immediately lose faith in the system and the stock. One needs to be playing on a field that is fair and just to all, not one sided or with advantage to one party.
Another aspect why Insider Trading is considered Illegal is that the insiders have direct access to money poured in by share holders in a company. This does cause conflict of the interest and make way for one person, or even the MD or CEO of a company to make more than what they deserve. Therefore, insider trading is illegal and must be banned ensuring people are eligible for what is just and rightfully theirs. Hope this information helps.