Insider trading facts for kids

Insider trading is when someone buys or sells stocks or other investments using secret information. This information is not known to the public. It gives them an unfair advantage over other investors.

Imagine a company is about to announce amazing new products. Someone who knows this secret information might buy a lot of the company's stock before the news comes out. Once the news is public, the stock price will likely go up. Then, they can sell their stock for a big profit. This is insider trading.

In most countries, using secret information for trading is against the law. It is seen as unfair and harmful to the stock market.

What is Insider Trading?

Insider trading happens when people use special, secret facts about a company. These facts are not known by everyone else. They use these secrets to make money by buying or selling the company's stock or other investments.

For example, a company employee might know that their company is about to sign a huge new deal. This deal will make the company's stock value go up a lot. If that employee buys stock before the public knows about the deal, it's insider trading.

Secret Information

The secret information is called "non-public information." It means facts that could change a company's stock price. This could be news about new products, big sales, or even financial problems.

People who have this secret information often work for the company. They might be executives, managers, or even their friends and family. They get this information before the general public does.

Why is Insider Trading Unfair?

Insider trading is considered unfair because it creates an uneven playing field. Most people who buy and sell stocks rely on public information. They do not have access to secret facts.

When someone uses secret information, they have an advantage. They can make money or avoid losing money in ways that others cannot. This makes the stock market seem less fair and trustworthy.

Impact on the Stock Market

The stock market needs to be fair for everyone. If people think that some traders have secret advantages, they might stop investing. This can hurt the overall health of the market. It can also make it harder for companies to raise money.

Fairness helps build trust. When there is trust, more people feel safe investing their money. This helps companies grow and creates jobs.

Is Insider Trading Always Illegal?

In many countries, including the United States, insider trading using secret information is against the law. Laws are in place to stop people from using unfair advantages. These laws aim to protect regular investors.

However, not all trading by "insiders" is illegal. Company executives and employees often own stock in their own companies. They can buy and sell this stock legally. But they must do so without using secret, non-public information. They also have to report their trades publicly.

Different Views

Some economists have different ideas about insider trading. A few believe it should be allowed. They argue that it helps make stock prices more accurate. This is because secret information quickly gets reflected in the stock price.

However, most people and governments believe that the harm to fairness and trust is too great. They think it is important to keep the stock market fair for everyone.

See also

In Spanish: Información privilegiada para niños