Dumb question, why is insider trading illegal?

I don't think you understand what insider trading is.

People are allowed to invest in the company they work for or own or are an executive in, they just aren't allowed to use the inside knowledge that they gain from said employment to make investment gains that the investing public could not.

it should be legal

newname wrote:

I don't think you understand what insider trading is.

People are allowed to invest in the company they work for or own or are an executive in, they just aren't allowed to use the inside knowledge that they gain from said employment to make investment gains that the investing public could not.

I already understand all of that

Because if insider trading were legal, it would create the impression that the playing field wasn't level, and that hits directly at the confidence in the system.

Without confidence in the system, free markets don't work well.

HardLoper wrote:

and we're stuck with the blind lottery.

You must really suck at investing.

Greedy Capitalist wrote:

Because if insider trading were legal, it would create the impression that the playing field wasn't level, and that hits directly at the confidence in the system.

Without confidence in the system, free markets don't work well.

it should be legal

newname wrote:

I don't think you understand what insider trading is.

This.

Investing doesn't always mean buy and hold. In fact, if you have inside knowledge, you can make a crap load more with options.

An example of why insider trading shouldn't be legal: if the CEO is allowed to dump all his shares prior to announcing bad earnings, it screw over all the other investors who didn't have access to that information.

Another example: a CEO could buy a crap load of puts, betting (and knowing) the stock will tank, and even intentionally make bad decisions in an effort to cause the stock price to tank. The CEO could actually make A LOT more money that way than they'd make as salary with far less effort.

It is considered illegal because the general public only has access to the news and analyst reports. People with "inside" information are at an advantage because they can act on events directly affecting a company's upcoming stock prices, which in the right situations gives them a huge advantage. For example, Martha Stewart was warned by a pharmaceutical company CEO that their new drug would not be approved by the FDA, and she proceeded to sell all her shares in the company to avoid a loss. No (or very few) other shareholders had that inside information and they suffered losses when the stock declined. Her stock sale could also be considered fraudulent because she knew the value was about to decline but some suckers who thought it was a good stock ended up purchasing her shares (doesn't matter if the transaction was brokered, she knew the price would decline and sold the shares.)

HardLoper wrote: Seems like if insider trading were legal, it would encourage people to invest in what they know, and know what they invest in. Anyway that ship has probably sailed by now and we're stuck with the blind lottery.

The whole point of securities is to give people the opportunity to invest in a company's success or bet on its failure. When a stock is publicly traded, the company is required to make disclosures to the public on a regular basis (8k, 10Q etc.). Those disclosures and earnings reports move the markets as the public is given information that was previously only known within the company. If people within the company can buy or sell stock based on information that has not yet been released to the public, they can make huge profits or avoid huge losses just by being an insider. That is like giving some kids the answers to the SAT before they take it. This also interferes with a company's ability to access capital markets. If every time a company was set to announce FDA approval or a merger or some other market moving disclosure the insiders could load up on stock while it was cheap, the inventing public would not bring as much capital to the company because the insiders have bought up all the stock (of course this effect varies based on the market cap).

It's like letting athletes bet on their own games.

X-Runner wrote:

It's like letting athletes bet on their own games.

It should be legal

Pete you can't bet on the Reds.

But I think it's fine if you bet on the other games.

X-Runner wrote:

Pete you can't bet on the Reds.

But I think it's fine if you bet on the other games.

I never bet on baseball. Period. I only lied and said I did because people I owed a lot of money to threatened to hurt me and then to tell the FBI that I was betting on baseball. I did NOT bet on baseball ever. I only told the FBI that I might have because they were talking about putting me in jail and stuff. I only told the Commissioner that I might have because he was threatening to never let me manage again.

I never meant it. I just said it cause it was what they wanted to hear, they said did you bet on baseball and I was like yeah sure whatever. But I never meant it.

I did NOT bet on baseball ever.

Phil Fondacaro wrote:

HardLoper wrote: Seems like if insider trading were legal, it would encourage people to invest in what they know, and know what they invest in. Anyway that ship has probably sailed by now and we're stuck with the blind lottery.

CEOs and other company executives can get accomplices to short their own company's stock pre-earnings when they know that a horrible earnings report is coming. Most believe that is unfair and should be illegal.

That is illegal too. It is just harder to get caught...

Unlevel playing field wrote:

People with "inside" information are at an advantage because they can act on events directly affecting a company's upcoming stock prices, which in the right situations gives them a huge advantage.

Insiders can create those situations. Sell stock. Cause a stock to tank based on dire reports they write. Then they can buy back in on the cheap. Then they run through the cycle again, and again.

Greedy Capitalist wrote:

Because if insider trading were legal, it would create the impression that the playing field wasn't level, and that hits directly at the confidence in the system.

Without confidence in the system, free markets don't work well.

This is exactly right. The impression is the important thing.

whatsupchuck wrote:

newname wrote:

I don't think you understand what insider trading is.

This.

Investing doesn't always mean buy and hold. In fact, if you have inside knowledge, you can make a crap load more with options.

An example of why insider trading shouldn't be legal: if the CEO is allowed to dump all his shares prior to announcing bad earnings, it screw over all the other investors who didn't have access to that information.

Another example: a CEO could buy a crap load of puts, betting (and knowing) the stock will tank, and even intentionally make bad decisions in an effort to cause the stock price to tank. The CEO could actually make A LOT more money that way than they'd make as salary with far less effort.

Yeah, he contends that he already knows this, but this idiot can't see why this is a bad idea.

Just give your friends tips and ask them to share the spoils.