Question

No more than half a page per essay.

19.  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

Two laws are:
1. Dodd Frank Act: This law was passed with the intention to protect the consumers of financial institutions and regulate the securities market .This law was passed after the recession of 2008 with the aim to protect too big to fall banks. This also made a clear demarcation between the activities of commercial banks and investment banks. It sought to regulate the mortgage and CDS market which were responsible for the recession in 2008.
2. Sarbanes Oxley Act: To protect investors and other stakeholders proper auditing of listed companies . This law was enacted.
It helped in scrutinizing any financial anomalies or misreporting by public companies. It also emphasised on whistle blower protection.

These laws are important to prevent recession and minimize its effects to investors by taking proactive steps like auditing and encouraging reporting of malpractices.

Insider trading means using information which is not available in the public and using it to make large transactions at the expense of other investors. Insider trading are carried by employees of a company or their relatives who have information which are sensitive and use it to carry out trading in the stock market .
It is prohibited because it causes huge losses to other investors and its is unfair to them as the transactions are done before they receive any information.

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