Question

According to the U.S. Securities and Exchange Commission (SEC), “Illegal insider trading refers generally to buying or selling a security, in breach of fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security.”  Your textbook notes that "stockholders require compensation for the risk they face; the higher the risk, the greater the compensation" (196). Some argue that insider trading is illegal and that a select few people trade on material nonpublic information, which results in the perception that markets are unfair and these actions will discourage ordinary people from participating in markets. The other side of the coin argues that insider trading is difficult to prove and that there is an opportunity cost, since the government must divert resources from cases that merit attention (i.e. theft, violent assaults, murder, etc.), and it is not worth prosecuting.

1) Do you believe that insider trading (the purchase or sale of securities by someone with information that is material and not in the public realm) is good or bad for the markets?

2) Do you believe that high-ranking officials whether in government or the private sector should be required to file detailed financial disclosures in order to maintain the trust of investors?

Answer 1

A) Trading in stock market means herein trader uses their knowledge, understanding , forcasts about future price and decides to trade. It is important that this process should be transparent. As insider uses critical information, unknown to public, it gives them an undue advantage , in which they incur huge profit leading to loss of small sharholders. If such unethical conducts continue, trading practice will loose its value for being unfair and unjust to the small share holders. In future leading to lower demand by the people to trade through this, which can impact the economy's growth. Price discovery will also get impacted. Though it is hard to prove and find the actual culprit but something that is unjust shouldn't be made acceptable just on the grounds that it is difficut to prove. This will lead to promoting unethical behaviours. Hence insider trading affects the market and is unethical.

B)Corporate governance has gained a huge importance. Improper disclosue can create havoc in the market. Many a times it was noted that due to non disclosure of materealistic information, a company lands into insolvency, impacting a lot of wealth of shareholders. In order to gain trust and bring clearity and boost confidence of investors proper disclosure is a must. A shareholder is the one who is termed as the owner of the company hence they should be given the right to know what the company is doing. Moreover, the higher satisfied investors are the more is the likelihoold of the company to grow. Disclosure of all relavant facts helps investors to decide better. The higher satisfied  the interested parties to the company are, the higher the company will go. Hence corporate governance is a must.