Implications of Insider Trading

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Insider trading is the trading of a public company’s stock or other securities such as bonds or stock options by individuals with access to nonpublic information about the company. The implications of insider trading in various countries, is that some kinds of trading based on insider information is illegal.  

This is because it’s seen as unfair to other investors who don’t have access to the information, as the investor with insider information could potentially make larger profits than a typical investor could make. Another implication of Insider Trading is that the authors of one study claim that illegal insider trading raises the cost of capital for securities issuers, thus decreasing overall economic growth. 

The rules governing insider trading are complex and vary significantly from country to country. The extent of enforcement also varies from one country to another. The definition of insider in one jurisdiction can be broad, and may cover not only insiders themselves but also any persons related to them, such as brokers, associates and even family members. A person who becomes aware of non-public information and trades on that basis may be guilty of a crime. 

The laws of insider trading and tipping apply to everybody. They don’t apply only to company insiders or executives, though their positions tend to put them at more risk than ordinary employees.  

There are financial regulators that purse insider-trading violations and make it a high priority. Such as that enforced by the United States (U.S.) securities law the Securities and Exchange Commission (SEC) and in South Africa for the Johannesburg Stock Exchange (JSE) the Financial Services Board (FSB). 

 

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