If you aim to make a case for criminalizing insider trading, just quit now. Not happening. Save much wasted effort.
So what procedures should a CEO have to go through before being able to act on his information? It seems to me that some degree of knowledge assymettry will exist no matter what. What is the dividing line between “insider” and “public” info. Does he need to inform 1 other person? 10? A million?
Yes, I know they don’t purchase directly from the CEO. I’m aware of how stock exchanges work.
As for losing less money, I didn’t know that was a good thing. Had that inside information been provided to investors, they might not have bought the stock, resulting in no loss. Instead, the insiders trade on the info, and people who bought at the wrong time get the condolence of losing less than they would have lost. Doesn’t sound very fair to me.
As for the partner thing, the example was that the partner was the insider, and you were the average investor. He was able to sell his investment before the value of the business plummeted. Because of this, even though both partners put up the same amount of money per share, the insider is entitled to less risk/more potential reward. In other words, he gets a discount on his investment, you don’t. You lost on day one.
As for when the CEO should be able to trade, how about during a brief window after each earnings statement is published. Make them share in the risk. It would probably make them more accountable. Using my CSCO example from earlier, the CEO would have to try to sell during the freefall like all other investors.
As far as who to inform, just do as I said, and make it a part of the earnings reports. They don’t have to send the info to every man, woman, and child. The people who are interested in the info are already reading it when it is published anyway.
That was your entire basis for the “crime” of inside trading. Not mine. Now, you’re going to start making arbitrary exceptions for when raking another person is a crime and when it is not. Remind me again why you are not advocating some form of tyranny? And how banning something that all parties voluntarily participate in is somehow compatible with the free market process.
I certainly hope that the investor with the better knowledge does, or at least statistically be performing better over time since he could and often does err in his calculations. Otherwise, investments would amount to nothing more then casino gambling, and the market could not efficiently allocate resources to where it’s most demanded by the public. All because the most suitable for the job of investments - those with the best knowledge and foresight, are deprived from specializing in their field.
It is not fair according to you. Why should somebody have more knowledge then you?
You want to play the “what’s fair and not fair” game?
How is it fair to all those ‘suckers’ who are now drawn into the stock, which is now obviously ‘overpriced’, because those with the most knowledge were deprived from acting and setting off the correction in time? When the stock does finally plummet, there will be more and not less ‘innocent’ (alleged unknowledgeable) victims.
How is it fair to all the consumers who suffer from higher prices due to the wasted capital and time that continued to be allocated into company X (by the ‘suckers’ above) rather then have that capital allocated instead to where it was more urgently needed?
You should change that to “all insider parties voluntarily participate.” I’m not advocating a ban of anything else but insider trading, which is giving two people who own the same asset different information, allowing one to have higher profits/fewer losses than the other.
Practically a straw man. I never said that no one should ever, under any circumstances, have an informational advantage over me.
So you’re asking me if it is fair that all owners of the same asset assume the same amount of risk per share? I don’t see why not. If an executive wrecks a company, the average investor that owns the stock will get stuck with the loss. Meanwhile, the executive offloads his shares, immune to the results of his own incompetency.
Please explain how shares being traded in the secondary market results in capital being “allocated” into company X. If one person buys shares, another person walks away with cash that can be invested in something else. There’s no money frozen in company X that doesn’t make it’s way back into the economy, unless those shares were bought in the primary or IPO markets.
If they were bought in the primary or IPO markets, then purchasers of the shares were given detailed disclosures of the business risks. Any money invested is transferred to the company, who can then invest it where they feel it will be most productive (that is, the money goes back into the economy). The money isn’t going into some insider’s pockets.
Doesn’t this imply that the company/those who run the company would try to create incentive for people to invest with the firm? Couldn’t companies make their employers/management sign contracts or clauses that reduce or eliminate the effects of insider trading?
Why is using an informational advantage immoral or economically innefficient? If “people should only trade based on public information” is a moral absolute, then I see your point.
As for losing less money, I didn’t know that was a good thing. Had that inside information been provided to investors, they might not have bought the stock, resulting in no loss. Instead, the insiders trade on the info, and people who bought at the wrong time get the condolence of losing less than they would have lost. Doesn’t sound very fair to me.
But laws about insider trading do nothing to make that information public. All they do is prohibit the insider from selling. That is, in such a situation, the only impact of the law against insider trading is to increase the size of the loss, not to cause disclosure that will prevent the loss. And, of course, it doesn’t prevent the loss, it just determines who has to bear the loss. Finally, the real cause of the loss in this situation, as is typical, is the government, this time in the guise of the health department.
As for the partner thing, the example was that the partner was the insider, and you were the average investor. He was able to sell his investment before the value of the business plummeted. Because of this, even though both partners put up the same amount of money per share, the insider is entitled to less risk/more potential reward. In other words, he gets a discount on his investment, you don’t. You lost on day one.
But how did it happen that two people opened a business together, and one was an insider and one wasn’t? It only works if we’re talking about a publicly traded company, so let’s do that. The insider is privy to information, from the government, that other traders aren’t. On the free market situation we’re discussing, this won’t happen either.
No, all parties in a free market would voluntarily participate, or they would not, and don’t invest in stocks that allow their CEO’s to sell company stock, and that’s the end of it.
I don’t advocate banning anything but cigarettes. Everyone should be allowed to support only one type of aggression towards others.
Who is giving? Nobody is giving anything. There is a seller and a buyer. For the third (or fourth time). How can a voluntary trade constitute a crime to one of the participating parties?
Yes, I know you said that. Only under the circumstances that you approve off or that the State approves off. Not under the circumstances which would arise by the voluntary consent of market participants. That would be a free market, which you apparently object to since you are still unwilling or unable to explain why there is a property rights violation in such voluntary trade.
NO. I am asking you no such absurd thing. I am asking you why what is not fair for some people that you apparently have in mind, is fair to other people, which you had not considered before. The stock will plummet anyway eventually assuming the knowledge of those you don’t want to trade is real. So most investors will not escape their fate. Worse, they may continue to invest more in company X thinking that all is good, only to take a bigger loss later down the road. There will also be new investors that will be drawn to the inflated stock price. Investors that could have been spared altogether if the prices took a dive at an earlier time if those with the knowledge had not been banned by you in acting.
Because if prices are market signals, then you would at least expect some adverse affects on prices of stocks not allowed to adjust as quickly as they could in order to reflect the more accurate state of affairs of the company.
There is potential bank credit that will be extended to the company that otherwise would not have been. Credit that could have found more productive use.
There are business contracts being renewed and even extended with partners; suppliers, competitor, and customers. Business activity that would not have occurred, or not at current level, if prices would have adjusted sooner rather then later. What about the cost of all this false activity? This is capital misalocation.
And I already mentioned the harm done also to investors, above.
And you completely ignore all the potential moral hazards created by such absurd government intervention. Executives being deprived from exercising their right to cash out on company stock when they know there is trouble ahead… Wow!, I suppose we can really expect some honest and detailed disclosures of the risks now that the value of the stock they own is tied to their executive reports. Next you’re going to have to ban all employees of any firm from owning any company stock.
Perhaps the company could do that. However, that would probably create inefficiencies in the market. One of the reasons the stock market is so highly liquid is that practically every share of common stock comes with the same rights. Think of it as a universal contract that saves investors from having to study each individual companies’ insider trading contracts. When I buy a share of stock, I have pre-emptive rights, dividend rights, voting rights, etc.
As for why it is immoral, I think it is wrong that you and I could go purchase a share of stock for the same price as someone with access to inside info, and he basically gets the better price, even though we all paid the same nominal dollar amount. He can buy or sell in advance of a press release for extra profits, while you and I have to wait until everyone finds out that the company is doing good/bad before we can make an informed decision to buy/sell. He’s not a better investor than we are, he just has access to more information.
As for economically efficient, I don’t think it is for the economy as a whole. If the insiders sell their stock as soon as they get bad news, sure, they can take those dollars and invest them in something better, which is good for economic efficiency. However, the poor schmucks that buy shares from the insiders indirectly through an exchange have spent their money on an overpriced asset, which is bad for economic efficiency. If they had better info, they would have put it to a more productive use with more information.
So overall, the insiders don’t make anything more efficient, they just transfer their losses to someone else with less information.
Yes, insider trading laws only prevent insiders from selling large quantities of stock. However, other laws exist that require CEOs and CFOs to certify quarterly statements, which must contain disclosures about the direction of the business and the risks inherent in the business. If they provide false info, they go to jail, so hiding information that should be made public is not the best option for them. Add to that the earnings call, where executives have to answer questions about what’s going wrong/right with the business… those executives can’t just say whatever they want.
Would it make the example better if 100 people opened a business, and from these 100 owners, a manager is elected? That’s pretty much how corporations work. Shareholders vote, either themselves or by proxy, to elect a board of directors who then in turn hire managers. A lot of times, the managers are also shareholders. These managers don’t have to call every last one of the 100 owners every time something goes wrong, just like Steve Jobs won’t call me if AAPL is in trouble. They only have to provide the quarterly statements as provided by law. So, if that manager was allowed to trade on inside info, he could bail on his shares without telling any of the other owners if things are going bad with the business. He could also buy more shares to transfer gains to himself from others who don’t have the same info as him (that would hold the stock if they did have the same info).
Yes, insider trading laws only prevent insiders from selling large quantities of stock. However, other laws exist that require CEOs and CFOs to certify quarterly statements, which must contain disclosures about the direction of the business and the risks inherent in the business. If they provide false info, they go to jail, so hiding information that should be made public is not the best option for them. Add to that the earnings call, where executives have to answer questions about what’s going wrong/righ with the business… those executives can’t just say whatever they want.
Then, pray tell, what the heck are you going on about? If you have the information and decide to simply follow the insider anyway, you’re an idiot.
As I explained in another post, each company having their own rules on insider trading would just add to the inefficiency of the market. Investors would have to waste time going over the rules of each company before making an investment decision.
You’re going into a whole different topic. My position is that insider trading should be banned. You haven’t provided any evidence, aside from your dislike for all bans, that allowing insider trading would be the better alternative.
Two people own stock in the same company. They each own a 1% share of the company. One has inside info, one doesn’t. Therefore, altough they have equal ownership shares, the advantage of insider info makes one of the owners “more equal than others.”
Find the quote where I said that if you are so confident. As for property rights, I’ve never even spoken about property them. I also never denounced the free market. You are going off on another tangent, probably because you lack the ability to speak intelligently about finance. See, I can make outlandish assumptions about you, too.
Do you understand that there are a fixed number of shares outstanding? If investors buy shares in company X because of the current public info, someone else has to sell those shares to them. While one investor increases his position in a stock, another must decrease theirs. So the fact that more investors show up is completely irrelevant.
What is relevant is that insiders can sell ahead of the herd, knowingly saving themselves losses. Any other sellers are just lucky.
Bank credit is never extended to the company based on their stock price. It’s extended based on the financial statements.
Contracts aren’t formed according to a company’s stock price, either. They are formed based on whether or not the contract will benefit the parties involved. Where are you getting this?
Finally, your point about investors being harmed didn’t make any sense. You talked about more investors possibly taking losses since more investors may buy the stock, while ignoring the fact that someone has to sell that stock to them.
Also, there’s very little misallocation of capital, since buyers of stock give cash to sellers of stock, who then go and buy other investments that they believe will offer better returns (which is why they sold their shares to begin with).
Sure, they could lie. If they wanted to go to prison. The CEO and CFO must certify quarterly statements, and they risk imprisonment if they decide to lie or withhold material information. I don’t see how lying benefits them.
That being said, please explain to me what the moral hazards are of not allowing CEO’s to have an unfair advantage over other investors.
Also, you’re going down some kind of slippery slope fallacy with the “all employees would have to be banned” statement. Usually, a very small proportion of the companies’ employees have the privilege of knowing information that doesn’t hit the newspaper.
Name calling… how noble of you.
Also, I have no idea what you are trying to ask me. You told me that CEO’s could lie. I told you they couldn’t, unless they want to go to prison. Somehow, you end up talking about having information and following an insider, without being clear on what the info is and why I am following this insider.
Name calling… how noble of you.
Also, I have no idea what you are trying to ask me. You told me that CEO’s could lie. I told you they couldn’t, unless they want to go to prison. Somehow, you end up talking about having information and following an insider, without being clear on what the info is and why I am following this insider.
Quick recap of the action so far: You initially were concerned about an insider purchasing stock, then selling it, and others following his lead to the buy, and therefore losing money. It was pointed out by others that people wouldn’t do this - that since you can imagine an insider doing this, so can the investors, and hence they won’t react by buying stock just because they saw an insider do it. You responded by saying that the knowledge that there is manipulation going on would then mean that people are staying out of the financial markets. I came in at this point and said that all it would mean is that people would have to look for other ways of making decisions about investments than following insiders, such as looking at assets and what the company is doing. You worried about them lacking information to do this, and I responded that insider trading laws do nothing to remedy your concern, if that’s what you’re worried about. You responded that, no, they don’t, but disclosure laws do. I then asked why you’re offering this as an argument for insider trading laws, since you’ve just told me it’s other laws that deal with what you’re concerned about. I didn’t say anything about CEOs lying. As far as idiots are concerned, yes, I think that, if you see that a company is actually not doing well, and decide to buy stock simply because you see an insider doing it, you deserve to lose money, and it would be wrong for the laws to protect you.
I wasn’t concerned, I was just explaining how insiders buying/selling stock does not improve the average investors ability to assess the value of the stock. They could only speculate. But do go on.
Couldn’t the investors also imagine the insiders selling because the company is in trouble? Or buying because the company is about to introduce an innovative new product? Again, the average investor must speculate.
Wouldn’t you? I mean, if insider trading was openly legal, and all companies allowed their executives to engage in it?
What do you mean look for other ways? That’s the first thing prudent investors would do… look at the financials. As far as what the company is doing, if it is doing something that only insiders are aware of, wouldn’t that give an insider an unfair advantage against you?
I know the current laws don’t remedy my concern, but if you look at 90% of the posts, the discussion is about whether or not their should be insider trading laws to begin with.
Yes, I went off on a tangent to answer your question, though it was pretty much completely unrelated to the discussion about whether or not there should be insider trading laws to begin with.
You’re missing the point. If insider trading was legal, which is the topic of debate, then the disclosure laws are irrelevant. Insiders could buy/sell before they were legally obligated to disclose information.
If not, my mistake. I apologize.
I agree, you would have to be an idiot to buy on that alone. I never advocated it. I just made the argument that insider buying/selling doesn’t improve an investor’s ability to determine whether a stock is under-/over-priced. Many made the claim that the simple fact that insiders buy and sell give us some new information about how much we should pay for a stock. I said it was impossible unless you knew why the insiders were buying/selling.
And who provides the financial statements???
It benefits them now since they cannot sell their company stocks. That’s precisely the point. When before, they had no such incentives to manipulate the books and conceal the real state of the firm, now that the value of their stocks depends on there own reports, the conflict of interest you complain about is created.
Open a new thread: The inefficiencies of markets vs. the efficiencies of socialism.
You tell me that bank credit depends on the stock price. I tell you it doesn’t, that it depends on the financial statements. Obviously, the business provides the financial statements, but that does nothing to support your idea that bank credit is dependent on something as volatile as a stock price.
So the fact that they can go to prison and pay exorbitant fines is not enough of a disincentive to not cook the books? What am I missing?
I see how there could be a conflict of interest if the law did not exist, but it’s pretty clear that the law is designed to mitigate that.
So outlawing insider trading = socialism. Gotcha.
Nice that you decide to change the topic when it’s clear that (A) you have very little knowledge of finance (you thought that business contracts would depend on the stock price… really?) and that (B) you have failed to provide any good arguments in favor of keeping insider trading that I haven’t been able to address.
I don’t plan on opening another thread, because I’m assuming you want me to take the position that socialism is efficient. Which is not a position that I hold.
Lets say an ‘insider’ is optimistic about the company’s performance and therefore its share value. He buys shares from the public. If the share price goes up and he sells, he makes a profit because he has judged the market conditions well. The person who bought from him is also optimistic about the performance of the stock and does not grudge the profit of the ‘inside’ investor. In turn, he sells for a profit, which just means someone else (another buyer) is more optimistic about that company stock than the previous two sellers. In case he errs in his judgement, and the company’s stock tanks, he loses.
Lets say an ‘insider’ is pessimistic about the company’s performance and expects its share value to drop. He bails (or shorts the stock). If his judgement is correct, he makes a profit because he has judged the market conditions well. The buyer, meanwhile, has taken a long position (or covered his shorts). If his judgement was correct, he makes a profit. If not, he loses.
All the market participants know the risk involved and trade voluntarily. Where is the need for regulation here?
The ‘inside information’ is a perk of working in the company whose stock you own. Information is always at a premium- that’s why there is an entire industry based on information.
Also, there is supply and demand at work here. If there is a huge influx of shares for sale, price drops (also, the demand decreases). If a company has good fundamentals and the demand is high, price rises (also, supply drops since people take long positions and hold their stock). These are all generalizations, but the bottom line is that voluntary transactions need no regulations except for enforcement of contract laws.
What is the point of this? People buy stock when they are optimistic about it? No news there.
You missed the point that when he bought the stock from the public, the public might not have sold for such a low price if they had been aware of the nonpublic information. They are the ones that should be upset.
One guy has inside info. The other doesn’t. Whose judgment is likely to win here? Face it, the buyer is the sucker in this transaction. He’s going long based on historical financial data, the insider is going short because the company is about to have a major negative event (like a recall) that will have a material impact on future earnings. Think Toyota.
Voluntary participation doesn’t take into account other important considerations, such as the cost of capital given different levels of investor confidence. If insider trading was legal, do you think that the risk premiums would be the same as they would be if it was illegal?
Inside information doesn’t just get used by employees of a company. It also gets used by friends/family of the execs, who share it with their friends/family, who share it with their friends/family, etc. Basically, they don’t pay for information, while other investors have to pay for a lack of it.
Not sure where you’re headed with this. Except maybe to say that since people voluntarily decide to risk their capital in a market where insiders are able to maximize gains and minimize losses while other investors are left in the dust, then everything is OK.