Why Is Insider Trading Bad?

Insider trading is something that people often speak of as a bad thing without actually explaining why. However, these claims are not without their reason.

Why exactly is insider trading such a problem? How does it pose a potential threat to the entirety of the free market?

Defining insider trading

Bloomberg looks into the rigging of stock markets via insider trading. Many people in the average population feel as though the wealthy and upper elite have the ability to control and sway the market – and in some cases, this is correct.

Insider trading roughly refers to acts that involve “inside information”, which the individual then uses to make choices about what stocks to buy or sell. For example, a CEO of a company about to file for bankruptcy cannot sell their stocks before announcing bankruptcy, as this is insider trading.

Destruction of trust

So why is this a big deal? In short, it destroys the trust that the market is based on. Stocks work because of a trust system, and investors are less likely to invest if they feel this trust is broken. This also goes for the average population, who buy fewer stocks when they feel like the market is unfair.

Unfortunately, it is not uncommon, and some people do not even know that they are participating in it. This does not spare someone from facing the full force of penalties for insider trading, however. This can include time in jail and enormous fines, so it is important to avoid committing this crime.