Question

The Securities Exchange Act of 1934 limits, but does not prohibit, corporate insiders from trading in their own firm's shares. What ethical issues might arise when a corporate insider wants to buy or sell shares in the firm where he or she works?

Answer 1

The Ethics Involved in Insider Trading:

Insider trading has managed to earn itself a dreadful name in the recent years. People who engage in insider trading are thought to be completely devoid of ethical values. However, not all individuals who engage in insiders trading are unethical; studies have shown that some insider trading is useful to the investment society. Some researchers in philosophy, law and economics have not decided whether insider trading should be penalized at all while others state that it should be illegal in all situations. The best thing to do is to detach those who are illegally harmed by insider trading. If such people exist, then obviously worded legislation could be passed to stop any scheme from being faithful against these people and groups, while allowing non- fraudulent transactions to be completed without dread of action. Until it can obviously be shown that an insider trading fraudulently harms an individual, there should be no law or regulation limiting the practice, since such limitations breach individual rights, it will also destroy the competition between the people and the company, and will most likely have a negative market response.

People often confuse the marketplace with a game in which rules of play are set and put into action so that everyone involved gets an even chance. The market is more similar to life itself in the sense that diverse people come with special assets, talents, looks, genetic makeup, economic and climactic conditions; and the people have to do their best with what they have. In reality, however, the theory of “insider trading“ used in business ethics has a wider meaning, which includes anyone’s capability to make agreements based on not yet publicized information of the company’s opportunities. Insider trading per se, apart from its association with fraud or violation of fiduciary duty, involves engaging in financial investments based on information others do not know about. It is apparent that such actions should be considered to be ethically immoral since they affect others unfairly. The fact that some people, or to say, insiders, have information that others don’t have, therefore, can be at a great disadvantage to the rest of the stakeholders since they cannot make use of this possibly valuable information. If the other stakeholders had knowledge of this information, they may have possibly acted in a different way and enjoyed the same advantage as the insiders.