Question

A) Explain the 3 roles that the stock exchanges play.

B) Explain the two laws that regulate the stock market in the U.S. and why they are important. What is illegal insider trading and why is it prohibited?

Answer 1

A) Stock exchanges play the following role:

(I) They assist in connecting the companies to the investors in turn enabling the businesses to raise money.

(ii) They help in spreading information and aid in investor education.

(iii) They act a safer medium to deal with risky securities and complex transactions.

B) The Securities Act of 1993 aims to protect investor interest by regulating companies to disclose all material financial information and prohibit misrepresentations and frauds in securities trading.

Securities Exchange Act of 1934 empowers the board to regulate all of the securities industry including stock exchanges, brokers and agents.

Insider trading is access to material information of the company that may influence decision making of the investor before the news is made public. This is illegal since any person having access to insider information may sells shares or buy shares in an unusual amount thereby making unusual gains and disturbing the stock market trends.