There has long been a debate in the Texas financial community that revolves around insider trading. Investopedia defines insider trading as the sale or purchase of securities by a person that has information that is not publicly known. This allows for those with inside information to trade and sell stocks before they decrease in value and can be a practice used by directors, company management, outside investors, fund managers and employees. The question is whether this practice should be legalized.
There is no specific law in the United States that prevents investors from insider trading. Through other laws and how they are interpreted, types of insider trading are now against the law. The Securities Exchange Act of 1934 is one example of a law that has directly influenced how insider trading can operate within a company or corporation.
Arguments against legalizing insider trading suggest that it can damage the integrity of the markets and discourage investors from participating in them. Because insiders with information not available to the public are able to benefit from gains and avoid losses, this eliminates the risk that it necessary to operate for ordinary investors.
It is also suggested that insider trading is unfair to those who do not have private information about their investments. Once the information is public, the market can integrate the information and accurately price the securities in question.
One argument for insider trading is that it includes more than just public information in the price of a security, making the market more efficient. Advocates suggest that the trends set by insider trading can convey the price to additional investors. It is argued that current investors could sell at better prices and a potential investor could buy at better prices if insider trading was legal.
Insider trading remains illegal under the interpretation of several securities laws, but many feel passionately that it should be changed. Violating these guidelines can result in fines and even prison time.
This is for educational purposes and should not be interpreted as legal advice.