Why Is Insider Trading A Bad Thing?

If you have spent any amount of time working within a company, you have likely heard of the term “insider trading” before.

What you may not have heard of are the potential consequences associated with it. Insider trading is a crime treated seriously, and the consequences reflect this.

What is insider trading?

The Conversation discusses the problems associated with insider trading. First of all, what exactly is insider trading in the first place?

Insider trading essentially involves one person taking inside information and using it to make decisions before the public at large has access to that same information.

For example, say you own stock in Company A while working for Company B. Company B has business ties with Company A, and through this connection, you catch wind that Company A will soon file for bankruptcy. If you use this knowledge to sell your stocks before Company A announces its bankruptcy plans to the public, this is insider trading.

Why is it bad?

So why is insider trading bad, then? Essentially, it is bad because it can do a lot of damage to the faith of investors. The entire stock market functions because investors have faith that the people they invest in are doing everything honorably.

When people begin to use their access to information as a way to get a leg up over the competition, it can put the investor’s faith in the entire market at risk. Essentially, it could cause the market to collapse. This is why insider trading gets treated so harshly, and why the penalties faced for committing it are such steep ones.