Question

Become familiar with the general basics of the regulatory rules applying to insider trading. You are not expected to become an expert in this topic. Apply this rule to the facts of this very brief case:

Someone you know has knowledge of an impending merger between two companies. The combination of the two firms will certainly change the market dynamics of the industry and owners of stock in either company will greatly benefit, once the news of the merger is publicly announced.

what is the socio-economic implications of this?

please be familiar with the SEC regulations on insider trading.

Answer 1

Insider trading is the practice of purchasing or selling a publicly- traded company's securities while in possession of material information that is not yet public information.

Trading by specific insiders, such as employees, is commonly permitted as long as it does not rely on material information not in the public domain. In the United States, trading conduct by corporate officer, key employees, directors, or significant stakeholders must be reported to the regulator or publicly disclosed, usually within a few business days of the trade. In these cases, insiders in the United States are required to file a Form 4 with the U.S. Securities and Exchange Commission (SEC) when buying and selling shares of their own companies.

In the United States, sections 16(a) and 10(b) of the Securities Exchange Act of 1934 directly and indirectly address insider trading. The authors of one study claim that illegal insider trading raises the cost of capital for securities issuers, thus decreasing overall economic growth.

Insider trading undermines public confidence in the securities markets. If people fear that insiders will regularly profit at their expense, suppliers will not be nearly as willing to contribute towards the company.