Why is insider trading bad for the market?

When dealing with the market, it is important to understand one thing above all else: integrity is key. Anything that compromises market integrity is likely going to classify as a crime, and those who partake will pay the consequences accordingly.

However, some of the crimes may not prove immediately notable. In fact, it is possible to make an illegal move without even realizing it, such as in certain cases of insider trading.

What is insider trading?

The U.S. Securities and Exchange Commission discusses insider trading and why it is bad for the market. Insider trading in a nutshell involves using inside information that the public does not have access to in order to make market decisions before anyone else can get a fair chance. For example, a person working for a large company may hear that the company will soon file for bankruptcy. They then sell their stocks before the announcement hits the public, thus acting on the advanced knowledge they had as an employee.

The importance of market integrity

It is important not to do this because it compromises market integrity, which can result in more investors refusing to participate. If the investors leave, then the entire balance and functionality of the market will spiral and could potentially crash.

Thus, it is crucial to understand what actions constitute insider trading. For example, telling relatives about news in a company that might affect its market trajectory can count as insider trading. An individual with that information does not need to use said information at all. Just passing it on to another person who acts on it can implicate them, and they will, unfortunately, suffer the legal consequences.