Why is insider trading illegal, considering that it is entirely logical to act on the basis of what you know?

You pick up here I think two things interchangeably.

  • Acting on the basis of your know is simply acting with knowledge.

Logically, this is not illegal. Incidentally, you are overestimating with the knowledge that you have one of the biggest mistakes in investing, but in another question you might ever have more.

  • The other case, insider trading, is acting on the basis of information that ‘ the market ‘ does not have.
  • The simplest example is here: The CEO who knows that his company has to dismiss 3,000 employees and is in financial trouble. He sells his shares in advance and suffers no loss. It is often a case of ‘ inside information ‘.

    Hope to have answered your question adequately!

    Cheers

    Max

    In science comes down to obtaining information which has (significant) influence on future price formation on the securities market.

    The basis for valuation within the financial industry is as follows:
    There are future cash flows, and we can calculate these cash flows to the present.In addition, an uncertainty factor applies, depending on the investment. Based on the cash flows, we can determine whether an investment is profitable, and on the basis of the uncertainty or the return and the risk are consistent. This leads to a certain market value, because the calculation shows that we want to buy, sell or do nothing. Each party in the market has different criteria for determining market value, which makes it possible to trade on the basis of supply and demand.

    In the case of inside studies, there is an understanding of a significant change in future cash flows, or a significant change in the uncertainty of these cash flows.This insight was obtained before the public was known, and thus the market cannot yet act.
    This creates a twisted ratio between supply and demand, because one of the parties acts on the basis of information that is not available to the other. This is an abuse of information and fraud.We should be reasonably wise to assume that the transaction was not closed if both parties had the same information.

    Trade with and in insider knowledge is not illegal.

    The law prohibits trade with and in-science only on the securities market.This is monitored by the FSMA in Belgium and the AFM in the Netherlands.

    Transaction costs are important here.

    In order to make a balanced, transparent and verifiable, accessible market, transaction costs must be kept low.Obtaining asymmetric knowledge often costs something. The lowest total transaction costs arise if everyone can only trade shares based on publicly available/inexpensive information.

    It’s about inside information and possibly bribery.Incidentally, it does not apply to everyone, members of the U.S. Senate are exempt;)

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