Answer to Question #169418 in Macroeconomics for Ashly Ceja

Question

When company executives buy and sell stock based

on private information they obtain as part of their

jobs, they are engaged in insider trading.

a. Give an example of inside information that might

be useful for buying or selling stock.

b. Those who trade stocks based on inside

information usually earn very high rates of

return. Does this fact violate the efficient markets

hypothesis?

c. Insider trading is illegal. Why do you suppose

that is?

Answer 1

(a). Example of inside information: expansion plan to increase revenue.

(b). The fact does not violate the efficient markets

hypothesis because the hypothesis states that a stock's price reflects all publicly available information concerning the stock value.

(c). Insider trading is illegal because it gives the insider an unjust advantage in the market, putting his interests above those the insider owes a fiduciary duty. The insider can artificially influence a company's stock value using the granted advantage.