The Ethics of Insider Trading

Topics: Stock market, Stock, Stock exchange Pages: 3 (1132 words) Published: October 11, 2014
The stock market plays a very important part in the lives of investors and companies. Similarly, it is the cornerstone of many historical events. The market allows investors to be partial owners of companies, thus contributing to its growth or even helping it survive. In return, dividends are paid to investors when the company is thriving. Often, those who play an important role in the financials of the company learn information that will dramatically change the future. If one of these people buys or sells stock based on this information, then it creates a type of conundrum called insider trading. Insider trading is making stock market transactions based on undisclosed, important information. This occurs when individuals buy stock to gain profits or sell stock to avoid losses when they receive confidential information. These “insiders” are usually a corporation’s’ management, owners, attorneys, accountants, etc. For example, if a management team meets privately to discuss massive layoffs that will be occurring in the next week, and then one of the managers sell its stock to avoid losses, this individual has practiced insider trading. Similarly, if a scientist of a publicly traded pharmaceutical company privately discovers the cure for Ebola, and proceeds to purchase a large amount of stock in the company before announcing the cure, that would be considered insider trading. The idea of ethics is primarily based on two key components: fairness and transparency. First, profiting or avoiding losing money because of possessing superior knowledge is unfair in every sense of the word. The stock market is no longer on an even playing field for the shareholders (McGee, 2008). Secondly, insider trading relies on a person intentionally acting before information is made public. This is a form of hiding information, and a lack of transparency. Especially with publically traded companies, their growth and success is dependent on shareholders. Their performance...

References: Hoffman, M. (2007). Martha Stewart’s insider trading case: a practical application of Rule 2.1. Georgetown Journal of Legal Ethics, 20(707).
McGee, R. W. (2008). Applying ethics to insider trading. Journal of Business Ethics, 77(2), 205-217. http://dx.doi.org/10.1007/s10551-006-9344-6
Shrestha, K., & Sawicki, J. (2008). Insider trading and earnings management. Journal of Business Finance & Accounting, 35(3/4), 331-346. http://dx.doi.org/10.1111/j.1468-5957.2008.02075.x
Yoon, Y., & McGee, R. W. (2012). Insider trading: An ethical analysis. International Journal of Finance, 24(1), 7070-7084.
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