Question

PLEASE KEEP RESPONSE TO A SHORT PARAGRAPH!

Please respond to the following discussion. The Securities Exchange Act of 1934 limits, but does not prohibit, corporate insiders from trading in their own firm's shares. What ethical issues might arise when a corporate insider wants to buy or sell shares in the firm where he or she works?

Answer 1

A corporate insider is known to be one who is in possession of some price-sensitive information that can directly or indirectly affect the share value. Any person who has got his hands on such sensitive information and knows if this information gets transmitted to the public, the value of the share or the security is going to be impacted. Suppose there is a situation when there is information that will raise the price of the security, the insider would definitely buy the security and in no case would like to sell his security. Now take an opposite scenario, the company is in troubled times, at such a time, the insider would not like to purchase an additional unit of the security, rather he would make sure to sell the security in time to avoid suffering any loss. Such valuable pieces of information are not available to the general public, making them vulnerable to the uncertainties of the stock market. While insiders make an extraordinary profit due to their knowledge about the information and other investors lose due to their unawareness of the confidential information.