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Is insider trading a problem?

On Behalf of | Sep 20, 2022 | White Collar Crimes

Insider trading is a term that many people who work in business industries may hear. People often speak of it negatively, and it can actually have serious legal repercussions, too.

But why is this the case? What about insider trading makes it such a problem?

Understanding insider trading

Bloomberg looks into the possibility of the stock market being rigged, and the public’s perception of this. Many members of the public believe that the upper elite and wealthy work the stock market in their favor, especially with the use of insider trading.

What is insider trading? Simply put, it is any use of information that the general public does not have access to with the intention of making stock market buying or selling decisions. In short, someone may use knowledge that only an employee, employer or CEO of a company would know in order to buy or sell company stocks.

The negative impacts on free markets

Insider trading is a bad thing for the market on a whole because the market itself thrives on a trust system. By essentially cheating with an unfair advantage, this system of trust ends up betrayed.

This makes it less likely for investors to participate in the market, which can cause its eventual collapse. It also hurts the average investment of the general populace, who often turn away from participating in the market when they feel that wealthier people have the upper hand unfairly.

To discourage and combat insider trading, penalties can range from hundreds of thousands of dollars to decades in jail, making it a crime to avoid.