Insider trading - Why is insider trading illegal?

A common question is why is insider trading illegal. Insider trading is indeed illegal in most countries of the world. There are three main reasons why this type of trade is considered illegal.

Lack of healthy competition. If a person received information ahead of time and took advantage of it, it puts him or her in a privileged position over the rest of the market participants;

Majority advantage. Since most insiders are large majority investors, the use of insider trading hurts retail investors, of which there are a majority in today's financial markets;

Leads to instability in the economy. Insider trading can create serious problems or even bring down a large company completely. The consequences of such a collapse can even affect a nation or the entire world.

For using insider information, a trader can be disbarred, fined, or even sentenced to prison.

What is false insider information?

Retail traders often fall victim to the type of fraud called false insider information. Some investors calling themselves an insider may spread false information and open a trade in the right direction, expecting it to be "hyped" by people who believed the "insider."

The alternative is to sell false information. An "insider" may directly approach an investor with an offer to buy information about a major deal. Fraudsters pose as employees of major companies or as hackers who have stolen information. As a result, the trader buys the information and opens a deal, after which he loses money.
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