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The Two Faced Coin We Call Insider Trading

By: Rayan M and Pooja R

The stock market has always had a significant impact on society, and it maintains its presence as a popular pastime for many to invest in. However, while many might be aware of the stock market, and might have traded or invested in stocks, the specifics and different elements in the stock market are not always revealed. Insider trading is the trading and investing of stocks through the use of information that is not available to the general public and is only known by the insiders of particular companies. While this may seem like an unfair shortcut and a way to cheat the stock market at first glance, there are still legal but also illegal methods of insider trading. Either way, the question must be asked: is insider trading ethical, or unethical when it comes to investing and trading within the stock market?

Side One: Legal Insider Trading

Insider trading is generally considered negative, but it does happen and is in fact done regularly in the stock market. Legal insider trading is when the insiders of a company trade shares, but are reporting all trades to the U.S. Securities and Exchange Commission, which is a government agency made to protect the American banking system and investors by enforcing laws in order to prevent market manipulation. Even though this form of insider trading may be legal, is it ethical for insiders to trade and invest in stocks while competing in the same market as those who are not insiders?

Insiders are aware of the statistics and key figures that are essential to the stock of their own company. Meanwhile, the common person may not have access to these key facts and figures, giving quite a significant advantage to the insiders, allowing them to take a larger share of the market’s profit. While it may be acceptable according to the law, it can still be seen as ruthless and greedy for people to take advantage of their position to the point where they can take control of the stock market, not giving a chance for others to compete. The situation of insider trading is very similar to a monopoly, where one particular entity can reap the benefits of a particular system, whereas the rest are left with no chance. Regardless of the fact that it is legal, it is certainly not ethical since most people will not have a chance to succeed as the insiders do in the stock market.

Side Two: Illegal Insider Trading

While there may be legal forms of insider trading, illegal insider trading is also present, and can similarly be seen as unethical, but this type of trading is against the law and prohibited by the U.S. Securities and Exchange Commission. While legal insider trading is reported to the U.S. Securities and Exchange Commission, illegal insider trading is where insiders do not care about the company itself, and rather show greediness through simply wanting to benefit from information of the company. Not only are the ethics of doing this in question, but the consequences are also harsh, as an illegal insider trading violation could possibly lead to a maximum penalty of up to 20 years in prison, or even as much as a maximum criminal fine of $5,000,000. Similar to legal insider trading, illegal insider trading can be seen as unethical since insiders have knowledge of specific details on stocks, and can therefore invest and trade accordingly. Moreover, with illegal insider trading, officials may not even be aware of it, meaning that it cannot be regulated and is far too much of an unfair advantage for insiders.

The ethical dilemma of insider trading is one that is very controversial, as it can be thought of differently based on which perspective it is approached from. From a neutral perspective, however, it is clear that insider trading uses monopolistic values and puts certain people at more of an advantage than others, therefore reducing competition and giving insiders an unfair advantage in the stock market.

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