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> A system that allows insider trading discourages participation by amateurs, because they do not have insider information. Insiders would earn money at the exp

> A system that allows insider trading discourages participation by amateurs, because they do not have insider information. Insiders would earn money at the expense of these amateurs How so? Can you flesh out the scenario a bit since I'm having trouble seeing how this is the case. To me, it seems like if there were no trade prohibitions on insider trading the share price would immediately reflect inside knowledge, thereby protecting amateurs from making investments based on facts that they don't know that others do.

omalleyt 11y ago
The share price likely wouldn't reflect insider knowledge. To see this, take an extreme example. The CEO owns less than 1% of most publicly traded companies. Even if he was allowed to sell his whole position without public disclosure, it wouldn't affect the stock price that much. Say he wakes up and finds out through insider knowledge that his company will go bankrupt tomorrow. He sells all his shares today. The stock drops a bit. It doesn't go to 0 just because he knows it should. A stock price reflects a weighted average of individual investor's knowledge and their capital. (Efficient market gets around this by assuming people are cool with not just selling the stock but shorting it all the way until it is as low as they think it should be. People don't tend to bet the farm (or have the ability to borrow funds to bet the farm) like that.)
- robotresearcher 11y ago
  But assuming that public disclosure was required for insiders, the CEO selling all their stock could drive the price down pretty quickly. People will be watching that particular 1% closely.
  - intended 11y ago
    This assumes really fast turn arounds on this information. There's time taken to submit data to a central clearing house and time taken for them to publish it. Many people may not want you to have a real time feed letting people know what shares they have just sold. There also exist accounting cycles and hence corresponding disclosure cycles. CEOs can make non related entity trades, mask trades, etc. Seasoned financiers are far smarter than the new entrant. They will find ways to reduce their "downside", and increase their upside. You always want to ensure that new entrants are not left to the mercy and warm fuzzy feeling of finance experts. The rule is that they can't afford them.

omalleyt 11y ago

The share price likely wouldn't reflect insider knowledge. To see this, take an extreme example. The CEO owns less than 1% of most publicly traded companies. Even if he was allowed to sell his whole position without public disclosure, it wouldn't affect the stock price that much. Say he wakes up and finds out through insider knowledge that his company will go bankrupt tomorrow. He sells all his shares today. The stock drops a bit. It doesn't go to 0 just because he knows it should. A stock price reflects a weighted average of individual investor's knowledge and their capital. (Efficient market gets around this by assuming people are cool with not just selling the stock but shorting it all the way until it is as low as they think it should be. People don't tend to bet the farm (or have the ability to borrow funds to bet the farm) like that.)

robotresearcher 11y ago
But assuming that public disclosure was required for insiders, the CEO selling all their stock could drive the price down pretty quickly. People will be watching that particular 1% closely.
- intended 11y ago
  This assumes really fast turn arounds on this information. There's time taken to submit data to a central clearing house and time taken for them to publish it. Many people may not want you to have a real time feed letting people know what shares they have just sold. There also exist accounting cycles and hence corresponding disclosure cycles. CEOs can make non related entity trades, mask trades, etc. Seasoned financiers are far smarter than the new entrant. They will find ways to reduce their "downside", and increase their upside. You always want to ensure that new entrants are not left to the mercy and warm fuzzy feeling of finance experts. The rule is that they can't afford them.