Why should you avoid insider trading?

On Behalf of | Sep 24, 2021 | Blog, White Collar Crimes |

Insider trading often gets spoken of in overtly negative ways by people within the industry, and many even blame it for disrupting the healthy growth of the market. To that end, you have likely learned you should avoid insider trading.

But do you know the exact reasons why it can negatively impact the market, and why partaking can continue to erode market integrity?

What is insider trading?

The U.S. Securities and Exchange Commission takes a look at the impacts of insider trading on the market. First, the definition of insider trading essentially boils down to making trades in the stock market based on knowledge the general public does not yet have access to.

For example, say that you work at a large company in which you attend a meeting where your higher-ups reveal that the company will soon file for bankruptcy. If you then use this information to sell your stocks in advance, this is insider trading. You use the information you have to gain an unfair advantage over others who do not know the company will soon go bankrupt.

This can also apply to people who you tell or sell this information to. If they get caught for insider trading, you can go down with them due to supplying them with that insider information.

Why is it damaging?

As for why you should avoid insider trading, the answer is relatively simple. In short, insider trading is unscrupulous behavior that shakes investors’ trust in the market and makes them less likely to invest or partake in trade. Without investors, the entire market could potentially collapse. This is why insider trading cases often face such harsh penalties that may seem over the top.