Question

SELECT ALL THAT APPLY PLEASE

Insider trading is... A. A way to outsmart the efficient-market hypothesis. B. An excellent investment strategy. If you know important information before everyone else, it's like betting on last night's basketball game. C. Illegal, but not many insiders get caught. OD. Using non-public information to your advantage in buying or selling stocks. E. Not something you can do unless you are a top executive (i.e., the CEO or CFO) of a major company.

Answer 1

The term insider trading refers to the practice of misusing the confidential information that one has access to and utilizing it to trade the shares so that one can make profits. The basic assumption of efficient market hypothesis is that every shareholder in the market has access to the same information at the same time. So, insider trading is a way to outsmart the efficient-market hypothesis. Option A is true.

Option B states that it is an excellent investment strategy as you know the information beforehand. While the fact that the person has information beforehand, is true, it is not a good investment strategy. It is a form of cheating the market which does not make it a good investment strategy. Option B is false.

Option C states that it is illegal but not many insiders get caught. This is a true statement as Insider trading is not permitted by law and legal action is taken against the people who commit this crime. Option C is false.

Option D states that Insider trading uses non-public information to your advantage for buying and selling stocks. This is a true statement as the insider has access to such information which the public does not know about. He / she then uses the information for buying or selling stocks so that he / she is earning more profits. Option D is true.

Option E states that Insider Trading is not something that can be done unless you are a top executive in a major company. The fact is that the information about the real financial position of the company is known only to the top executives. So, Option E is true.

Thus, Option A, D and E are true.