Although it appears to be intelligent, especially when privy to some degree of knowledge, insider trading is wrong and illegal. Members of the public do not have equal access to information utilised by an insider in the transaction, and the trade becomes unfair. Insider trading in stock market trading occurs when information a party trades with is not available to the entire public, thus negatively impacting the firm.
Although there is no regulation prohibiting workers or management from trading the company’s shares, an employee’s predisposition to jump on a transaction (either buy or sell) as a consequence of knowledge or an incident he is aware of due to his position within the organisation is a direct form of insider trading. However, the most typical kind of insider trading is indirect insider trading. An employee who is aware of an anticipated event in an organisation advises a friend or acquaintance to trade on the business shares. While it is easy to trace and punish direct insider trading, it is difficult, if not impossible, to do so with indirect trading.
Insider trading is illegal in any case, and those who engage in it risk significant penalties or jail terms. It impacts the corporation and its shareholders, the stock market’s operations, and hence the general public.
Effects on the company’s shareholders
Every investor wants to increase the value of their assets and ultimately benefit from them. Insider trading permits a small number of investors to benefit at the cost of others, impacting the whole shareholder community. A manager’s fiduciary duty to the company’s shareholders includes the duty of care and loyalty to all shareholders. Investor trading provides commitment solely to the insider trader and the direct shareholders they are in contact with. Insider trading reduces shareholders’ earnings.
The impact on the firm itself
A corporation that is vulnerable to insider trading is susceptible to various sorts of misconduct. For example, a desperate employee seeking to trade stocks as an insider may intentionally harm the firm to maximise profit.
Impact on the stock market and the broader public
The major thrill of trading stocks and investing, in general, is the stock market’s unpredictability. Investor profitability is affected by their capacity to analyse the market or engage with competent brokers successfully. The stock market loses its lustre due to insider trading since it has become associated with sure students knowing the answers before taking an exam. Potential clean investors are often at a disadvantage. When insider trading becomes popular, some investors withdraw from the market, reducing the flow of capital and causing the economy to deteriorate.
Companies with persistent insider trading issues should attempt some of the measures outlined below to address it.
Employees and management must be properly educated about consequences.
Employees are sometimes less concerned with the company’s profitability and development. Such employees consider insider trading to make a personal profit at the expense of the shareholders and the general public. As a result, workers must know about the long-term implications of such behaviours on the organisation and all employees.
While it is unjust to prohibit people from trading stocks in the firm for which they work, one effective strategy to reduce insider trading is establishing an atmosphere in which regulators may connect with several individuals inside a company. Companies may use this to perform checks on insider trading. Insider trading whistleblowing may be done in-house or via a third party.
Have employees seek clearances before trading
In circumstances where workers must trade, management should devise a system for periodically reviewing employee trading portfolios.
Importantly, advising people against engaging in insider trading is solely a function of helping them see the harm insider trading does to the company and the entire public.