Insider Trading

Abstract

To engage in insider trading is, roughly speaking, to buy or sell securities on the basis of privileged information. Suppose, for example, that the president of a company learns that another company wants to take his over. Suppose he secretly buys a large amount of his company's stock and makes a handsome profit when the public at large is finally informed of the takeover. This president has engaged in a classic bit of insider trading. Insider trading does not necessarily involve a purchase of stock. Sometimes, a company employee will possess privileged information which, when made public, will hurt his company's stock. This person might respond by selling stock he owns, or even by selling short his company's stock1; and by doing so, he is engaging in insider trading. Furthermore, insider trading does not have to involve the purchase or sale of a company's stock. Indeed, much insider trading involves not stock, but rather stock options.2 By buying options, a person can leverage his investment so that his profits will be far greater than if had bought or sold stock. Another important thing to realize about insider trading is that the person doing the trading doesn't have to be an employee of the com pany whose securities he trades. He can, to begin with, be an of the company. Suppose, for example, that the company hires a printer to print up pamphlets explaining an as-yet-unannounced take over to the company's shareholders. In printing these pamphlets, the printer will have access to privileged information; and if he trades on the basis of this information, he will be engaged in insider trading even though he is an agent of the company rather than one of its employ ees.3 Furthermore, a person who is neither an employee of a company nor its agent can also engage in insider trading. Suppose, for example, that the president of a company informs his sister of a coming takeover that has not yet been announced to the public, and