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 Securities Exchange Act of 1934 limits, but does not prohibit insider trading. Are per the act, the directors of the company are allowed to do insider trading till the time they disclose there buying and selling activity to the SEC.

Insider trading means acting on the information which is not available to the public and making gains or avoiding losses. One reason why insider trading is not prohibited completely by the act is that it release the information in the market and helps the share price to reflect the information.

But, apart from one argument in it's favor there are many which are against it. Insider trading is ethically unsound. Insider trading allows a corporate insider ( whoever it may be) to get access to information which is non-public and can affect the share price. This leads to unfair play practice by those insider's and can have negative impact on the reputation and share of the company.

Insider trading also leads to investors losing their confidence in the company and this may stop them from partaking in them.

It also Rob's the investors who do not have non public information of receiving the full value for their Securities. All of this in turn harm the integrity of the capital Market.