Ethics

Insider trading is the practice whereby the top executives of a company and other officers in the board of directors use their influence to transact in the stocks and securities of the company. It is usually done by buying and selling stock for own benefits. The trading of the stock can take two points of view it can be done within a legal framework and it can also take a form that is quite unethical and of very little benefit to the majority of shareholders and other stakeholders in the company. When the legal insider trading is done, it is required that the Security Exchange Commission (SEC) is made aware and relevant documentation done. The law requires that insiders who intend to practice this and happen to own more than ten percent of the companys securities register at the SEC. This is done by registering under the section 12 of the Security Exchange Act making a statement that declares their ownership of the securities. In the case of illegal insider trading, information is kept secret from the public. The public in this case is the parties who have interest in the company including the shareholders, the bigger stakeholders and the public that is willing to be part of the company. This is usually in breach of trust and confidence placed on them by the companys statutes while in possession of material that contains explicit information about the company securities. Another form of insider trading that is illegal is the selling of important information by the insiders to prospective buyers who will act accordingly to acquire securities in the company. Reh (2010) is of the opinion that paying the relevant authorities so that they do not reveal the transaction is also illegal. The insiders who are likely to be paid so that they do not reveal the goings on include the company lawyers, its investment bank and all the parties privy to inside information on the bank.

The ethical framework that can be applied to analyze the insider trading is based on the impact that insider trading is likely to have on the company. Therefore, it is of importance to note that there are unpleasant consequences that insider trading is likely to have on the company. Firstly, ethically, it is quite unfair for the top management to seclude the other stakeholders in the event that there are developments that are likely to make them benefit from trading of stocks and securities. The pragmatic actions by those involved only serve to make a small section of the stakeholders to benefit and as such might impact upon the company-shareholder relationship negatively. In the event that the public gets wind of the occurrence of such practice, the perception of the company in the public limelight changes. A bad reputation is therefore set for the company in the public limelight. This will have effects such as an ever eroding investor confidence on the company stock. Consequently, the performance of the company at the stock exchange will be affected as most likely trade in their shares and securities will be affected. The aspect of competition in the market is ignored when insider trading is done. This is due to the assumption that while the company might be benefitting, the actual owners of the company do not get to see the benefits. In as much as the company might have the profits trickling in, the reflection will not be seen in the shareholders dividends due to the fact that the securities traded by the insiders might not be available to the common shareholders. The securities might be of high value that cannot be within the reach of the small-time shareholder. Engelen and Liedekerke (2006) are of the opinion that insider trading is highly likely to push the value of stock towards its market value. In as much as this might be good for the stock market, the market capitalization is likely to be a threat to its existence. This is because other competing companies will have information on the profitability and other financial information of the company. Not only can they use this to their advantage but they could also run down the company easily by involving in unfair market practices.

The law, as is required, suggests that insider trading should be made public so that information is relayed to the public. The law enforcement as such only serves to enforce the ethics that should be adhered to when carrying out insider trading. Suffice to say that the law influences the ethical view. Therefore, it is prudent to look at the law as a measure that actually enforces ethical behavior in practicing insider trading. The Security Exchange Commission has laws stipulating that every insider wishing to practice insider trading should make this declaration by signing documents which will be made public as stated earlier. In short, the law tends to allow some form of insider trading. It is therefore only fair to conclude that the law might not be a watertight measure to apply when mitigating the effects of insider trading. The consequences of insider trading as enforced by the law can be Penalties charged by the SEC. Such penalties will require that the guilty give back the profits they accrued due to their illegal activities. In other instances, they might part with as much as three times the amount of profits that they raked in. If the legal SEC acts that permit insider trading are not observed, it will be absolutely fine to conclude that insider trading is otherwise criminal.

In conclusion, Ma (1998) and Sun (1998) opine that the ethical arguments fostered against insider trading lean heavily on the moral ramifications rather than provide empirical evidence supporting the claim that insider trading is not good. This is due to the fact that the ethical perspective does not really provide studies showing whether the stakeholders financial capacities actually decline as suggested. As such, more and more people continue to perceive insider trading differently with time. It is therefore prudent that we analyze each and every situation differently. Whereas some would see it s an unfair practice in the regulated markets, others would not. Free markets do not provide every player with an equal opportunity. Therefore, the situation upon which insider trading is practiced dictates the ethics behind it. It would be a bit one-sided to impose rules that are not regular in a free market. On the other hand, regulated markets take care of business malpractices by the use of laws. As such, anyone guilty of such practices will be answerable to a court of law.