Paving The Way To Justice

Cassandra Stamm
Paving The Way To Justice

Is insider trading a problem?

On Behalf of | May 18, 2023 | Criminal Law

Many people have heard of insider trading, and know that it is punishable by law and highly frowned upon.

Fewer people know why this is the case. Why are penalties so high for insider trading? Why is it such a big problem across all industries?

Defining insider trading

The U.S. Securities and Exchange Commission discusses insider trading as a potential problem. But first, it is important to understand what insider trading is.

This happens when a person uses their inside information to make unfair decisions in the stock market. For example, say an employee of a big company knows before the public that their company will soon file for bankruptcy. If they sell their stocks before the general public knows, this is using an unfair advantage to get an edge in the stock market.

Insider trading also applies in instances where a person on the “inside” gives or sells their information to others so that other people can make these illegal moves, too.

The ripple effect

So why is this such a problem? In short, the stock market runs on investor trust. Investors want to see proof that the market runs fairly without giving any unfair advantages to particular individuals.

Therefore, insider trading disrupts this balance and makes it hard for investors to keep their trust. This makes them less willing to invest, which can have a ripple effect on the health and prosperity of the entire stock market.

This is why insider trading gets penalized so strongly in the instances where people get found out.