Impact of Insider Trading on Stock Markets

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Financial regulators oppose both trading on and tipping inside information because insider trading undermines investor confidence in the fairness and integrity of the securities markets.  

Insider trading has to do with the stock market and those with ownership of stock. These can be corporate insiders, officers, directors, and employees buy and sell stock in their own companies. When corporate insiders trade in their own securities, they should then report their trades through the reports insiders must file. That’s the legal route of insider trading. 

Illegal insider trading occurs when someone uses news others aren’t privy to. As a means to profit in the stock market, or when someone helps a select group of others to make favourable trades in that company’s securities. Of stocks, bonds, call options in the stock market from the secret. To gain an advantage when the stock price moves after the information is released.  

Insider tipping is also illegal. It means telling others about secret stock-price-moving information. The impact of illegal insider trading is considered negative for both the small investors and for the markets. Illegal insider trading ensures that there’s no fair play involved or fair demand and supply of stocks, all detrimental to the functioning of a healthy capital market. 

Publicly-traded companies rely on large numbers of people to purchase shares of their stock. One can also say that the biggest difficulty created by insider trading is a lack of faith in the exchange markets where these illegal trades take place. 

But also not all arguments regarding insider trading are against it. Considering that insiders know more about a company than others they’ve a better gauge than most as to the financial health of the business. Like for instance, if insiders are buying shares in their own companies, they usually know something that normal investors don’t. They might buy because they see great potential, a merger, and acquisition or simply because they think their stock is undervalued.  

Therefore one argument in favor of insider trading is that it allows for all information to be reflected in a security’s price and not just public information. This makes the markets more efficient. As insiders and others with nonpublic information buy or sell the shares of a company, for example, the direction in price conveys information to other investors. Current investors can buy or sell on the price movements and prospective investors can do the same.

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