Insider Trading
Insider Trading
Investors Suffer from Insider Trading
Insider trading presents an adverse effect for the investors and the country at large. In this regard, it prevents the fair quantum of supply and demand for the stocks and contributes towards having an artificial increment in the stock prices, thus enticing innocent investors to buy the stocks at increased prices than that of their original value (Stefano, 2011). Consequently, soon after the purchasing of the stocks, it plunges in the market bringing about immense losses for the investors that in turn contributes to a significant dip in SENSEX value which finally weakens a country's entire economy (Insider Trading and its Harmful Effects, 2010). During the modernized age, in which the capital markets across the globe is infected with the insider trading disease, it is imperative to be aware of the working mechanism of this principle. In such kind of transaction, an insider within a corporation purchases the stock and shares the information about the price sensitivity with a small group of individuals, who purchase the stock and pass over the information (How insider trading can impact you, 2009). Subsequently, there is the creation of an artificial demand for a certain stock and when its prices reach the pleasing level; the insider leaves the market together with his small group of individuals by selling the stocks, thus making a big profit. A short time after selling, the stocks reduce in price bringing about big loses to the investors.
In case the securities markets are considered to be rigged, then the investors may lose their confidence in those markets and refuse to take part in them, even though investing in the publicly traded stocks might be the most profitable long-term investment strategy (Kamath, 2012). In this line, some proof for such concern can be obtained from the famous “ultimatum games” (Bainbridge, 2013). Apparently, these experiments show that individuals will typically refuse to take part in what they consider being unfair transaction even if the participation would boost their financial self-interest (Fishe & Robe, 2007). Additionally, some observed evidence gives a suggestion that those countries that have more stringent insider trading laws enjoy reduced costs of capital, as well as more liquid securities markets. Undeniably, this is an indication of a likely inverse relationship between the investor confidence and insider trading (Henning, 2011). In this sense, this loss of the investor confidence would pose a threat to the liquidity and depth of the markets. Notably, this “investor confidence” justification was particularly recommended by the Supreme Court in O’Hagan to rationalize its extension of the federal insider trading policy to encompass misappropriation policy (Bainbridge, 2013).
Innocent investors can easily conduct insider trading by accident and therefore, there is a need to take some measures to protect themselves. For instance, the investor should ensure every individual they trade with has clear insider trading policy. The investor may be held liable for any action of anyone else on his or her team. There is a need to have agreements and policies in place to make sure that trade does not trade outside the security laws’ bounds (Smith, 2016). Ostensibly, companies that have specially insider trading policy in place usually have quite minimal changes to get involved in this kind of fraud.
Moreover, the investors should check their sources; if anyone they are connected to offer information before conducting a trade, the investor should ensure that he or she can access the same information via publicly available information. In case that information cannot be found anywhere else, the investor may make a decision not engage in the trade. Additionally, the investor should identify when someone offering the information is in violation of a breach of duty (Smith, 2016). In this regard, this is an indication that the information being offered should not be received. Indeed, the investor should ensure that he or she is aware of the kind of information being passed along to him or her and whether or not such information is conveyed in a manner that is likely to breach insider trading policies.
Furthermore, the investor should always follow the news and keep updated about the knowledge regarding who gets involved in insider trading and evade investing in those firms. Mover, the firms that have a history of insider trading should be avoided. In other words, the investor should always be on the watch out about the current trends in the market about insider trading (Federov, 2016). Another protective measure is that the investor should be cautious about how he or she repays favors. In this case, the investor may be in a condition where he or she has access to the investor information regarding his or her company or employer he or she has worked with. In case someone has done a favor to the investor before, he or she needs to ensure that he or she is cautious about how to pay back that favor. In the same line, the investor should not provide sensitive information; in case he or she does, he or she is just as guilty of the securities scam as they are (Barucci, 2002).
Also, the investor should report to the appropriate authorities when he or she obtains information linked to his portfolio, which he or she is not sure whether it is public information or not. In this sense, this can assist in proving that the investor has no intention of inconspicuously utilizing insider information and that he or she has honest intents. Lastly, the investor should watch the questions he or she asks when he or she is receiving information regarding a particular security. In this regard, the investor ought to be cautious to avoid phrasing questions in a manner that incites someone to reveal confidential information before conducting a trade (Smith, 2016). Equally important, the investor should not give an impression that he or she is looking for such kind of information, since doing this can get him or her in just as much trouble as indeed carrying out an inside trade.
With no doubt, the activity of insider trading is indeed a grave crime. Therefore, it is strongly advisable to the investor that before he or she is tempted to get involved in trading securities based on the information, which is not publicly accessible, he or she ought to be aware of the consequences of engaging is such an act. Apparently, one could possibly be jailed for up to twenty-five years and the likelihood of being caught is quite high than one might imagine (Macey, 1991). Many cases of professional investors, as well as financial managers being convicted of the securities scams have been reported; definitely, an investor should do all he or she can to protect him or herself against charges related to getting involved in insider trading.
References
Bainbridge, S.M. (2013). Research Handbook on Insider Trading. New York, NY: Edward Elgar Publishing.
Barucci, E. (2002). Financial Markets Theory: Equilibrium, Efficiency, and Information. New
York, NY: Springer Science & Business Media.
Federov, S. (2016). The Negative Effects of Insider Trading. Retrieved April 17, 2016. From,
http://www.ehow.com/info_8055278_negative-effects-insider-trading.html
Fishe, R. & Robe M. A. (2007). The impact of illegal insider trading in dealer and specialist
markets: Evidence from a natural experiment. Retrieved April 17, 2016. From,http://www1.american.edu/academic.depts/ksb/finance_realestate/mrobe/Seminar/BWPaper_RD4.pdf
Henning, P. J. (2011). Why Insider Trading Is Wrong. Retrieved April 17, 2016. From,
http://dealbook.nytimes.com/2011/04/11/why-is-insider-trading-wrong/?_r=0
How insider trading can impact you, (2009). Retrieved April 17, 2016. From,
http://www.rediff.com/money/report/perfin-how-insider-trading-can-impact-you/20091112.htm
Insider Trading and its Harmful Effects – A Legal Perspective, (2010). Retrieved April 17, 2016. From, http://www.ialm.academy/insider-trading-and-its-harmful-effects-a-legal-perspective/
Kamath, S. (2012). Plugging the Leaks. Retrieved April 17, 2016. From,
http://www.businesstoday.in/moneytoday/stocks/how-to-shield-your-investments-from-insider-trading-scams/story/187516.html
Macey, J. R. (1991). Insider Trading: Economics, Politics, and Policy. New York, NY: American Enterprise Institute.
Smith, K. (2016). What Is Insider Trading and How to Avoid It – Definition, Laws & Cases. Retrieved April 17, 2016. From, http://www.moneycrashers.com/what-is-insider-trading-definition-laws-cases/
Stefano, T. F. (2011). Who's Hurt by Insider Trading? Retrieved April 17, 2016. From,
http://www.ecommercetimes.com/story/73674.html
