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Why is insider trading illegal?

On Behalf of | Mar 30, 2022 | FINRA And SEC Investigations

You know well that insider trading is illegal, and you’re not allowed to make trades based on proprietary information that you have access to before the general public. Doing so would give you an advantage in making your trades because you would know if the price was likely to go up or down, but other investors would not.

But have you ever wondered why this is illegal? Wouldn’t it just be good business to get tips from people who know what may happen in the future? If you had contacts at certain companies, wouldn’t making investments in those companies based on those individuals’ recommendations just make sense? Why would something like this be illegal?

The general public needs to trust the system

The problem is that the trust that people have in the markets and the entire financial system is fairly fragile. They need to trust that they have the same opportunities to make investments as everyone else. They may be using less money and smaller accounts, but the system cannot feel like it has been rigged against them.

If people felt that way, it would seriously harm their desire to invest. This would pull a lot of potential money out of the market, which would be highly detrimental to the economy. So you could say that insider trading is illegal simply because it is unfair, but it’s more important to understand all of the reasons why an unfair trading system is actually problematic in the United States.

Are you facing allegations?

There can be a major hit to your reputation if you’re facing allegations of insider trading, not to mention potential legal ramifications. Be sure you understand all the options at your disposal.