Someone on an NG I post to says he sees nothing wrong in insider trading, but I heard on Neil Cavuto say that if you sell your stock the day before you know it’s going to tank, then someone else has to buy it, and this makes it a crime.
Why does someone else have to buy it?
Am I missing something here?
I don’t own any stock BTW. I’m just ignorant and hoping to be enlightened.
Thanks, y’all!
Quasi
No one else has to buy it, but in a market of matching supply and demand (by means of price changes), someone will buy it. You didn’t force them to buy it, and they had their own reasons for buying. The fact that you knew something the other didn’t doesn’t affect him, unless the portion you’re selling is so large it will affect the price of the share. If you own 50% of all IBM stock, and decide to dump it all because your buddy the CFO tells you the company’s taking a huge financial hit, John Doe owning 10 shares WILL be hurt, because your sale makes the price drop dramatically.
The argument of a victimless crime is often made in insider trading debates. But it all boils down to being fair: every investor should have the same chances in the market, and trades therefore should only be made based on fully public information.
Is this idea naive? Yes.
Does it stop insider trading? Not in a million years.
How are they going to make someone buy stock? Hold them at gunpoint?
IANASB (I Am Not A Stock Broker), but the way I understand it is that if you sell stock, it goes into a big collective pool o’ shares, which other people buy from. Frankly, I’ve never seen what the big deal about insider trading is, other than that you’re taking advantage of info which the general public doesn’t have.
I’ve never seen anything wrong with fraud, other than the unjust enrichment that people attain from the fraud and the money and property which is lost by those who are defrauded. Otherwise, fraud is a-ok with me.
Insider trading is wrong because it breaks the rules. It’s like dealing poker, and knowing all the cards you’re dealing out.
When a company official controls business deals in a way that benefits himself, but not necessarily the company, the employees, or the stock holders, then he’s breaking the rules. Business rules say that anyone who buys a share of stock has an equal risk with anyone else who owns a share.
As an example. Supposing I’m the president of a company, and own 10% of the stock. I’ve just had a meeting with my major customer, and he told me he is dropping our contract. That means the company is in deep shit. But I’m the only one who knows. Before I go back to the office, I phone my stockbroker, and sell my stock – at any price, I don’t care. That’s insider trading, because the other 90% of the stockholders have no idea that something has gone wrong.
Ok, some of you are smirking, business is business. Somebody won, somebody lost.
The problem is this: no investor in their right mind is going to buy stock if they think that the company officials will sell out at the first opportunity, leaving everyone else with nothing. The deal is this: we invest with the understanding that we’re taking the same risk as anyone else with the stock. If the deal is REALLY that Joe Blow will get a part of the profits, if there are any, but will lose his shirt if somebody does Insider Trading, then the amount that Joe Blow will pay is pennies instead of dollars. And that’s REALLY bad news for any company that’s trying to raise money by selling their stock. It means they can’t raise any money.
The bottom line is that when you loan somebody money, you expect to get it back, with interest. Insider Trading means you could very well lose everything you lent.
Whoa, whoa. There’s no such thing as a guaranteed return on an equity investment. It it not a loan - painting it as such gives novices the wrong idea.
Buying a stock is investing in a company’s equity. You bare full risk, and may lose all your money, whether there is insider trading or not.
You also have the issue of investor confidence in the market. Even assuming normal risks of investing, a person puts money in a stock based on public information and the faith that the information is correct. Insiders get more than that, and when there is more insider deals going on that become public, confidence in the public information goes down. Throw in cooked books and you approach a market meltdown. It’s true that in the short-term there are no readily identifiable “victims” unless the company involved goes belly-up and screw over investors, workers, pensioners, etc. So it’s more of a macro- problem instead of micro-.
And let’s not forget that it makes the perpetrators look like sleaze-bags.
For the sake of discussion, let’s say a person owns stock. Somehow this person comes into reliable information about the future of the stock.This information is not favorable. The person did not solicit the information. The info says the stock is going into the tank. Is this person supposed to hang on to the stock and take the loss?
jacksen9, that’s an excellent question, in fact one that’s always troubled me.
I’m not sure there’s any such thing as an even field in the stock market business. I had a cousin, working for a brokerage, who told me that all their best deals went to their customers who had more than $500,000 invested. That means you and I end up with odds that are significantly stacked against us. Even before Insider Trading.
If I know 10 times as much about copper mining as the next shareholder, is that an unfair advantage? I’m not sure. It would be if I told the next sharehold his risk was the same as mine.
Coldfire, I’m only saying that most small investors put their money in the market with (rather naive) expectations that they can control the amount of risk they’re taking. Invest in cotton? It’s pretty safe. Invest in bio-enhanced-auto tires? Very risky, but potentially very lucrative. Invest in a company with Insider Trading? Pooh. Why not have a good time and go to Monte Carlo, instead?
The stock market is a gamble under the best conditions. Add insider trading, and it goes from a game of Poker to a game of 3-Card-Monty. Imagine the following:
1 day before GE announces its earnings. You believe it to be underpriced at $28 and wish to buy some shares. Someone is willing to sell those shares at $27, is it the CEO who knows it will drop to $20 15min after the earnings are announced? If you wish to sell, is the buyer who’s willing to pay $30 some insider who knows it will skyrocket to $40 after the announcement? You haven’t the slightest idea, but if insider trading becomes rampant, all you know is that you stand a good chance of being on the short end of the stick.
Understand, an insider will be willing to pay a higher than “market price” for a stock he knows will go up, and will sell below market for one that will go down. Normal investors will not do that. This willingness to go to non market prices will intice normal investors to make trades that they otherwise might not.
You may lose money in the stock market, but at least you’re on a (sort of) level playing field.
A lot of this goes back to investor confidence. Investments are based on the concept of an ‘arms length’ transaction in which all parties have access to the same information. If people don’t have confidence that they can make an informed decision or that they have complete information they won’t invest. The whole system of business capital would screech to a halt and with it all of those nifty business that rely on equity.