Ethical Decisions About Insider Trading

by Matt Petryni
Talking to people in a company's supply chain can inform investment decisions.

Talking to people in a company's supply chain can inform investment decisions.

Insider trading is an important topic of discussion for employees and managers of publicly traded corporations that are considering a purchase or sale of company stock. Decisions regarding insider trading inevitably raise ethical and legal questions, and those examining the practice must take careful consideration of these issues. Failure to engage ethically in trading decisions is usually bad business practice and sometimes carries legal consequences.

Basics of Insider Trading

Whenever a one of company's employees, managers, or other related individuals engages in a trading decision regarding the company they work for or manage, the trade is considered to be an insider trade. Relatives, friends and regulators who work with the company may also be considered insiders if they have access to private information and could make a trading decision based on it. Insider trading is often considered unethical, though in some cases it is legal with adequate public disclosure.

Arguments Against

In ethical decisions about insider trading, it is important to consider the moral arguments against insider trades. Insider trading is widely considered to be unethical, even though it is not always legally prohibited. Those who argue that insider trading is unethical contend that it can lead to fraud -- managers or other insiders intentionally misleading investors about a company's performance while making personal trading decisions inconsistent with public information. Ethical arguments often rest on the question of integrity of markets, and assume that transparency is critical to efficient decision-making by consumers and investors.

Arguments in Favor

While the law generally recognizes many forms of insider trading as unethical, moral arguments are also to support the practice. Those who contend that insider trading is ethical sometimes believe that those with access to insider information cannot be easily distinguished from regular investors, whose level of information is also highly variable. Others believe that the gathering of insider information is hard work and highly time-consuming, and forcing disclosure or prohibiting use of the intelligence they've gained is unfair and discourages valuable research.


The issue of legality for insider trading is somewhat complex. Whether or not insider trading is illegal -- and the penalties it carries -- varies considerably according to the nature of the trade, the insider information that inspired it, and the relationship of the insider with the company. Insider trading is legal "when corporate insiders -- officers, directors, and employees---buy and sell stock in their own companies," and report their trades publicly, according to the Securities Exchange Commission. SEC rules prohibit insider trading when practiced "in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security." This includes cases when corporate officers acted on confidential information, even if they disclosed the trade publicly, and when outsiders, such as relatives, who are "tipped off" by an insider engaged in similar trading practices.

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