The business ethics of insider trading are a gray area for many investors right now. With illegal insider trading cases making the news, ethical arguments for both sides of the issue are emerging. The true business ethics of insider trading are complex, but they come down to simple principles.
Business ethical issues with insider trading.
From a business perspective, there are still ethical issues with insider trading. Businesses exist to make money. It's a fact that a capital market accepts and is a cornerstone of American culture. But a few making money at the expense of the many raises not only moral ethical issues, but also business issues. When investors don't have the money to invest, or they don't have confidence in the market, they don't invest. Undermining that confidence can have severe financial repercussions, as well as affecting the market as a whole; in which case the advantage of a few comes at the cost of many-a cost that can continue for years.
Insider stock trading and the economy.
Before Black Tuesday and the Great Depression, insider stock trading laws didn't really exist. Companies took advantage of this absence to inflate company stock values unfairly and make a ton of money on the market. Ultimately, corporate manipulation led to the stock market crash of Black Tuesday, which triggered the Great Depression. Insider stock trading laws were enacted after this crash to prevent companies from manipulating the stock market and otherwise influence investing decisions; without which, another great market crash could easily occur.
Duty of trust or confidentiality.
Insider trading also violates the duty of trust or confidentiality that one individual or business entity owes to another. In a duty of trust argument, the person or entity that has access to proprietary information owes a duty of trust not to use that information against the people who don't possess it. In a capital market, this takes the form of insider trading. Sharing insider information that leads to investment decisions is a direct breach of confidentiality.
Moral ethical issues with insider trading.
While moral ethical considerations of insider stock trading aren't the primary focus of ethical discussions, they still play a part in evaluating insider trading. Essentially, the moral ethical arguments all come down to one basic fact: It's wrong for investors to take advantage of other investors. In a level playing field where everyone has the same information, investment success is based on skill.
In a market rife with insider trading, people can use secret information to take advantage of their opponents. This means that their gain comes at the cost of someone else's loss; not a loss based on skill, but a loss based on having information that someone else doesn't have. Abusing this information is morally wrong, as it violates the principals of fairness upon which the capital market is based.