Subject:
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Re: Insider Trading (Was: Re: Lego Direct (was Re: Georgia LEGO Outlet is Cool!))
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Newsgroups:
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lugnet.off-topic.debate
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Date:
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Thu, 30 Mar 2000 17:32:03 GMT
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Hello Richard:
There is more to this than just manipulating stock prices. Existing and
new shareholders have to have some comfort that they are been treated
equitably and have confidence in the stock market. Capital stock markets
are one of the ways that companies can raise new capital. Investors would
not invest in that market if they do not have some confidence in the market.
An example, would be the Russian market verses the New York or Nasdaq.
I for one would not invest in a market if I thought there was lots of
insider trading and the market was a "free for all." From time to time the
market will halt trading for short periods of time if there is material new
information that the company wants to disclose that will have an impact on
the stock price.
Let me give a couple of examples that are not related to stock price
manipulation. Lets suppose that a company is involved in merger talks with
several companies. In these situations, the talks may not be publicly
disclosed. Suppose that company A agreed to sell their shares (subject to
shareholder approval) for a 25% premium to current prices to company B. If
insider trading was legal, all the insiders could purchase shares in company
A before this information was disclosed to the public and make a 25% premium
on this trade. Lets suppose you were a shareholder in this company for
several years and you sold your shares to the insider at the current market
price and discovered the next day that the shares are now worth 25% more.
The insiders in this example, did not manipulate the price by giving false
information. If you had the same information, that the insider had, it
would be unlikely that you would have sold your shares prematurely.
The stockmarket eagerly waits for earnings information. Businesses are
getting more and more complicated. And they have lots of accountants
calculating earnings and cash flow. And for competitive reasons, public
companies may not want to disclose major potential orders until the order is
in the bag. Insiders may have information that can have a major impact on
the share price. If they can buy or sell shares based on insider
information, then other shareholders would be at a disadvantage. If an
insider sold a million shares just before the company announced a major
negative correction in their earnings and you were the buyer of some of
those shares, it might take you a long long time to recover your losses. As
an investor, you would lose confidence in the market. On the otherhand, if
you sold shares in the company to an insider and the insider knew that the
company signed a major new order that added 50% to the business, then you
may have sold shares for too low of a price.
Unfortunately, it is hard to prove insider trading. It probably occurs
more often than we think. Some people avoid trading in certain markets
because they suspect insider trading. Some people like me, will only buy
shares in public companies if we think that we will be treated fairly and
that the regulatory agencies will aggressively pursue insider traders. I
would be hard pressed to find an example, where allowing insider trading
would be an advantage to the average shareholder.
There is some controversy around how some companies disclose
information. Some companies have private information sessions with a large
number of investment analyst prior to publicly disclosing the information.
This can put individual investors that don't have access to this information
or would have to pay brokerage firms to get access to this information at a
disadvantage. Why should a shareholder have to pay a brokerage firm for
public information or get the information after the analysts at the
brokerage firms ? Managers of large mutual funds get private meetings with
large public corporations. Can Joe public call up the Chief Finanancial
Officer an get a private meeting ? Or can Joe public get stock in a new
stock issue ?
Long ways from Lego but that is why we are in off topic debate.
Albert Shikaze
Calgary, Alberta, Canada
"Richard Franks" <spontificus@yahoo.com> wrote in message
news:Fs3w94.7BA@lugnet.com...
> In lugnet.dear-lego, Jeff Johnston writes:
>
> > The reason that "insider trading" is illegal in the stock market is to • prevent
> > people from unfairly manipulating stock prices. Imagine this:
> >
> > CEO Guy: OK, Bob, here's the plan. Our stock is low, you buy a whole • bunch of
> > it. We'll make a false leak about a new breakthrough and the price will • rise.
> > You'll sell the stock and we'll split the proceeds before anyone realizes • that
> > the "breakthrough" never happened.
>
> I admittedly know very little about stock market stuff, so this is mean in • the
> spirit of innocence - my flame proof suit is at the dry-cleaners..
>
> I've just become curious about this "insider trading" law thingy - has the
> market ever operated without it? Is it a stabilising measure designed to • stop
> exploitation? (Seems a weird measure for a capitalistic institution!)
>
> What would the market be like without this law? And does the LP plan on
> abolishing it along with a lot of other laws?
>
> In our information age, would established corperations might play "CEO and • Bob"
> games, precisely because if they did so - who would trust them enough to • invest
> in them again? I'm not trying to troll with the LP references - it just • seems
> to me that the LP is all about using knowledge and information and freedom • as
> stabilising factors, as opposed to laws which can have a tendancy to cause
> ripple-unstability.
>
> Is it possible that the stock market would be more 'fair' and equal • without it?
> Those with true insider information would benefit - great says I, it makes
> information more important than vast sums of capital which can survive the • odd
> risk or so.
>
> If allowing insider trading would mean that rumours like "Microsoft are • going
> to buy this small computer company", could be trusted even less.. then • whenever
> the rumour becomes official.. every "outsider" has an equal chance to get • their
> slice of the pie? And those who took the risk can benefit the most?
>
> Maybe I just need some more examples, but I'm not convinced that • disallowing
> "insider trading" doesn't just help keep the big guys big, and the small • guys
> small. Which of course would be as good as any reason for its existance!
>
> Richard
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