If you aim to make a case for criminalizing insider trading, just quit now. Not happening. Save much wasted effort.
So what procedures should a CEO have to go through before being able to act on his information? It seems to me that some degree of knowledge assymettry will exist no matter what. What is the dividing line between "insider" and "public" info. Does he need to inform 1 other person? 10? A million?
Now, let's look at a situation the laws actually apply to. In a large stock market, people who buy the shares from the CEO are not being called on the phone and asked if they'd like to buy shares. They're calling their brokers and asking to buy shares. The only difference based on the fact that the CEO is selling is that they buy at a lower price, hence losing less money. As far as the partner is concerned, I have no idea what injury you're claiming for him. I would have lost my money anyway; how am I better off if you also lose?
Yes, I know they don't purchase directly from the CEO. I'm aware of how stock exchanges work.
As for losing less money, I didn't know that was a good thing. Had that inside information been provided to investors, they might not have bought the stock, resulting in no loss. Instead, the insiders trade on the info, and people who bought at the wrong time get the condolence of losing less than they would have lost. Doesn't sound very fair to me.
As for the partner thing, the example was that the partner was the insider, and you were the average investor. He was able to sell his investment before the value of the business plummeted. Because of this, even though both partners put up the same amount of money per share, the insider is entitled to less risk/more potential reward. In other words, he gets a discount on his investment, you don't. You lost on day one.
As for when the CEO should be able to trade, how about during a brief window after each earnings statement is published. Make them share in the risk. It would probably make them more accountable. Using my CSCO example from earlier, the CEO would have to try to sell during the freefall like all other investors.
As far as who to inform, just do as I said, and make it a part of the earnings reports. They don't have to send the info to every man, woman, and child. The people who are interested in the info are already reading it when it is published anyway.
M1ThinkTank:Yes, one person could conceivably rake another person over the coals in a used car transaction. However, ......
That was your entire basis for the "crime" of inside trading. Not mine. Now, you're going to start making arbitrary exceptions for when raking another person is a crime and when it is not. Remind me again why you are not advocating some form of tyranny? And how banning something that all parties voluntarily participate in is somehow compatible with the free market process.
M1ThinkTank: One of the investors has access to inside information, the other does not. Which investor gets the better price on their stock purchase?
One of the investors has access to inside information, the other does not.
Which investor gets the better price on their stock purchase?
I certainly hope that the investor with the better knowledge does, or at least statistically be performing better over time since he could and often does err in his calculations. Otherwise, investments would amount to nothing more then casino gambling, and the market could not efficiently allocate resources to where it's most demanded by the public. All because the most suitable for the job of investments - those with the best knowledge and foresight, are deprived from specializing in their field.
It is not fair according to you. Why should somebody have more knowledge then you?
You want to play the "what's fair and not fair" game?
How is it fair to all those 'suckers' who are now drawn into the stock, which is now obviously 'overpriced', because those with the most knowledge were deprived from acting and setting off the correction in time? When the stock does finally plummet, there will be more and not less 'innocent' (alleged unknowledgeable) victims.
How is it fair to all the consumers who suffer from higher prices due to the wasted capital and time that continued to be allocated into company X (by the 'suckers' above) rather then have that capital allocated instead to where it was more urgently needed?
You should change that to "all insider parties voluntarily participate." I'm not advocating a ban of anything else but insider trading, which is giving two people who own the same asset different information, allowing one to have higher profits/fewer losses than the other.
Practically a straw man. I never said that no one should ever, under any circumstances, have an informational advantage over me.
You want to play the "what's fair and not fair" game? How is it fair to all those 'suckers' who are now drawn into the stock, which is now obviously 'overpriced', because those with the most knowledge were deprived from acting and setting off the correction in time? When the stock does finally plummet, there will be more and not less 'innocent' (alleged unknowledgeable) victims.
So you're asking me if it is fair that all owners of the same asset assume the same amount of risk per share? I don't see why not. If an executive wrecks a company, the average investor that owns the stock will get stuck with the loss. Meanwhile, the executive offloads his shares, immune to the results of his own incompetency.
How is it fair to all the consumers who suffer from wasted capital and time that continued to be allocated into company X (by the 'suckers' above) rather then have that capital allocated instead to where it was more urgently needed?
Please explain how shares being traded in the secondary market results in capital being "allocated" into company X. If one person buys shares, another person walks away with cash that can be invested in something else. There's no money frozen in company X that doesn't make it's way back into the economy, unless those shares were bought in the primary or IPO markets.
If they were bought in the primary or IPO markets, then purchasers of the shares were given detailed disclosures of the business risks. Any money invested is transferred to the company, who can then invest it where they feel it will be most productive (that is, the money goes back into the economy). The money isn't going into some insider's pockets.
I don't see how that necessarily follows. A company needs cash for expansion. If we agree that legalized insider trading will spook investors, then investors will be unwilling to give their hard-earned cash to that company because they might get raked over the coals by insiders. As a result, it will likely be either very difficult to raise capital, very expensive to raise capital, or both.
I don't see how that necessarily follows.
A company needs cash for expansion. If we agree that legalized insider trading will spook investors, then investors will be unwilling to give their hard-earned cash to that company because they might get raked over the coals by insiders. As a result, it will likely be either very difficult to raise capital, very expensive to raise capital, or both.
Doesn't this imply that the company/those who run the company would try to create incentive for people to invest with the firm? Couldn't companies make their employers/management sign contracts or clauses that reduce or eliminate the effects of insider trading?
Why is using an informational advantage immoral or economically innefficient? If "people should only trade based on public information" is a moral absolute, then I see your point.
M1ThinkTank:You should change that to "all insider parties voluntarily participate."
No, all parties in a free market would voluntarily participate, or they would not, and don't invest in stocks that allow their CEO's to sell company stock, and that's the end of it.
M1ThinkTank: I'm not advocating a ban of anything else but insider trading
I don't advocate banning anything but cigarettes. Everyone should be allowed to support only one type of aggression towards others.
M1ThinkTank: which is giving two people who own the same asset different information
Who is giving? Nobody is giving anything. There is a seller and a buyer. For the third (or fourth time). How can a voluntary trade constitute a crime to one of the participating parties?
M1ThinkTank:I never said that no one should ever, under any circumstances, have an informational advantage over me.
Yes, I know you said that. Only under the circumstances that you approve off or that the State approves off. Not under the circumstances which would arise by the voluntary consent of market participants. That would be a free market, which you apparently object to since you are still unwilling or unable to explain why there is a property rights violation in such voluntary trade.
M1ThinkTank: So you're asking me if it is fair that all owners of the same asset assume the same amount of risk per share?
NO. I am asking you no such absurd thing. I am asking you why what is not fair for some people that you apparently have in mind, is fair to other people, which you had not considered before. The stock will plummet anyway eventually assuming the knowledge of those you don't want to trade is real. So most investors will not escape their fate. Worse, they may continue to invest more in company X thinking that all is good, only to take a bigger loss later down the road. There will also be new investors that will be drawn to the inflated stock price. Investors that could have been spared altogether if the prices took a dive at an earlier time if those with the knowledge had not been banned by you in acting.
M1ThinkTank:Please explain how shares being traded in the secondary market results in capital being "allocated" into company X
M1ThinkTank: If they were bought in the primary or IPO markets, then purchasers of the shares were given detailed disclosures of the business risks.
Doesn't this imply that the company/those who run the company would try to create incentive for people to invest with the firm? Couldn't companies make their employers/management sign contracts or clauses that reduce or eliminate the effects of insider trading? Why is using an informational advantage immoral or economically innefficient? If "people should only trade based on public information" is a moral absolute, then I see your point.
Perhaps the company could do that. However, that would probably create inefficiencies in the market. One of the reasons the stock market is so highly liquid is that practically every share of common stock comes with the same rights. Think of it as a universal contract that saves investors from having to study each individual companies' insider trading contracts. When I buy a share of stock, I have pre-emptive rights, dividend rights, voting rights, etc.
As for why it is immoral, I think it is wrong that you and I could go purchase a share of stock for the same price as someone with access to inside info, and he basically gets the better price, even though we all paid the same nominal dollar amount. He can buy or sell in advance of a press release for extra profits, while you and I have to wait until everyone finds out that the company is doing good/bad before we can make an informed decision to buy/sell. He's not a better investor than we are, he just has access to more information.
As for economically efficient, I don't think it is for the economy as a whole. If the insiders sell their stock as soon as they get bad news, sure, they can take those dollars and invest them in something better, which is good for economic efficiency. However, the poor schmucks that buy shares from the insiders indirectly through an exchange have spent their money on an overpriced asset, which is bad for economic efficiency. If they had better info, they would have put it to a more productive use with more information.
So overall, the insiders don't make anything more efficient, they just transfer their losses to someone else with less information.
But laws about insider trading do nothing to make that information public. All they do is prohibit the insider from selling. That is, in such a situation, the only impact of the law against insider trading is to increase the size of the loss, not to cause disclosure that will prevent the loss. And, of course, it doesn't prevent the loss, it just determines who has to bear the loss. Finally, the real cause of the loss in this situation, as is typical, is the government, this time in the guise of the health department.
Yes, insider trading laws only prevent insiders from selling large quantities of stock. However, other laws exist that require CEOs and CFOs to certify quarterly statements, which must contain disclosures about the direction of the business and the risks inherent in the business. If they provide false info, they go to jail, so hiding information that should be made public is not the best option for them. Add to that the earnings call, where executives have to answer questions about what's going wrong/right with the business... those executives can't just say whatever they want.
But how did it happen that two people opened a business together, and one was an insider and one wasn't? It only works if we're talking about a publicly traded company, so let's do that. The insider is privy to information, from the government, that other traders aren't. On the free market situation we're discussing, this won't happen either.
Would it make the example better if 100 people opened a business, and from these 100 owners, a manager is elected? That's pretty much how corporations work. Shareholders vote, either themselves or by proxy, to elect a board of directors who then in turn hire managers. A lot of times, the managers are also shareholders. These managers don't have to call every last one of the 100 owners every time something goes wrong, just like Steve Jobs won't call me if AAPL is in trouble. They only have to provide the quarterly statements as provided by law. So, if that manager was allowed to trade on inside info, he could bail on his shares without telling any of the other owners if things are going bad with the business. He could also buy more shares to transfer gains to himself from others who don't have the same info as him (that would hold the stock if they did have the same info).
Yes, insider trading laws only prevent insiders from selling large quantities of stock. However, other laws exist that require CEOs and CFOs to certify quarterly statements, which must contain disclosures about the direction of the business and the risks inherent in the business. If they provide false info, they go to jail, so hiding information that should be made public is not the best option for them. Add to that the earnings call, where executives have to answer questions about what's going wrong/righ with the business... those executives can't just say whatever they want.
As I explained in another post, each company having their own rules on insider trading would just add to the inefficiency of the market. Investors would have to waste time going over the rules of each company before making an investment decision.
You're going into a whole different topic. My position is that insider trading should be banned. You haven't provided any evidence, aside from your dislike for all bans, that allowing insider trading would be the better alternative.
Two people own stock in the same company. They each own a 1% share of the company. One has inside info, one doesn't. Therefore, altough they have equal ownership shares, the advantage of insider info makes one of the owners "more equal than others."
Find the quote where I said that if you are so confident. As for property rights, I've never even spoken about property them. I also never denounced the free market. You are going off on another tangent, probably because you lack the ability to speak intelligently about finance. See, I can make outlandish assumptions about you, too.
Do you understand that there are a fixed number of shares outstanding? If investors buy shares in company X because of the current public info, someone else has to sell those shares to them. While one investor increases his position in a stock, another must decrease theirs. So the fact that more investors show up is completely irrelevant.
What is relevant is that insiders can sell ahead of the herd, knowingly saving themselves losses. Any other sellers are just lucky.
Because if prices are market signals, then you would at least expect some adverse affects on prices of stocks not allowed to adjust as quickly as they could in order to reflect the more accurate state of affairs of the company. There is potential bank credit that will be extended to the company that otherwise would not have been. Credit that could have found more productive use. There are business contracts being renewed and even extended with partners; suppliers, competitor, and customers. Business activity that would not have occurred, or not at current level, if prices would have adjusted sooner rather then later. What about the cost of all this false activity? This is capital misalocation. And I already mentioned the harm done also to investors, above.
There is potential bank credit that will be extended to the company that otherwise would not have been. Credit that could have found more productive use.
There are business contracts being renewed and even extended with partners; suppliers, competitor, and customers. Business activity that would not have occurred, or not at current level, if prices would have adjusted sooner rather then later. What about the cost of all this false activity? This is capital misalocation.
And I already mentioned the harm done also to investors, above.
Bank credit is never extended to the company based on their stock price. It's extended based on the financial statements.
Contracts aren't formed according to a company's stock price, either. They are formed based on whether or not the contract will benefit the parties involved. Where are you getting this?
Finally, your point about investors being harmed didn't make any sense. You talked about more investors possibly taking losses since more investors may buy the stock, while ignoring the fact that someone has to sell that stock to them.
Also, there's very little misallocation of capital, since buyers of stock give cash to sellers of stock, who then go and buy other investments that they believe will offer better returns (which is why they sold their shares to begin with).
And you completely ignore all the potential moral hazards created by such absurd government intervention. Executives being deprived from exercising their right to cash out on company stock when they know there is trouble ahead... Wow!, I suppose we can really expect some honest and detailed disclosures of the risks now that the value of the stock they own is tied to their executive reports. Next you're going to have to ban all employees of any firm from owning any company stock.
Sure, they could lie. If they wanted to go to prison. The CEO and CFO must certify quarterly statements, and they risk imprisonment if they decide to lie or withhold material information. I don't see how lying benefits them.
That being said, please explain to me what the moral hazards are of not allowing CEO's to have an unfair advantage over other investors.
Also, you're going down some kind of slippery slope fallacy with the "all employees would have to be banned" statement. Usually, a very small proportion of the companies' employees have the privilege of knowing information that doesn't hit the newspaper.
Then, pray tell, what the heck are you going on about? If you have the information and decide to simply follow the insider anyway, you're an idiot.
Name calling... how noble of you.
Also, I have no idea what you are trying to ask me. You told me that CEO's could lie. I told you they couldn't, unless they want to go to prison. Somehow, you end up talking about having information and following an insider, without being clear on what the info is and why I am following this insider.
Quick recap of the action so far: You initially were concerned about an insider purchasing stock, then selling it, and others following his lead to the buy, and therefore losing money. It was pointed out by others that people wouldn't do this - that since you can imagine an insider doing this, so can the investors, and hence they won't react by buying stock just because they saw an insider do it. You responded by saying that the knowledge that there is manipulation going on would then mean that people are staying out of the financial markets. I came in at this point and said that all it would mean is that people would have to look for other ways of making decisions about investments than following insiders, such as looking at assets and what the company is doing. You worried about them lacking information to do this, and I responded that insider trading laws do nothing to remedy your concern, if that's what you're worried about. You responded that, no, they don't, but disclosure laws do. I then asked why you're offering this as an argument for insider trading laws, since you've just told me it's other laws that deal with what you're concerned about. I didn't say anything about CEOs lying. As far as idiots are concerned, yes, I think that, if you see that a company is actually not doing well, and decide to buy stock simply because you see an insider doing it, you deserve to lose money, and it would be wrong for the laws to protect you.
Quick recap of the action so far: You initially were concerned about an insider purchasing stock, then selling it, and others following his lead to the buy, and therefore losing money.
I wasn't concerned, I was just explaining how insiders buying/selling stock does not improve the average investors ability to assess the value of the stock. They could only speculate. But do go on.
It was pointed out by others that people wouldn't do this - that since you can imagine an insider doing this, so can the investors, and hence they won't react by buying stock just because they saw an insider do it.
Couldn't the investors also imagine the insiders selling because the company is in trouble? Or buying because the company is about to introduce an innovative new product? Again, the average investor must speculate.
You responded by saying that the knowledge that there is manipulation going on would then mean that people are staying out of the financial markets.
Wouldn't you? I mean, if insider trading was openly legal, and all companies allowed their executives to engage in it?
I came in at this point and said that all it would mean is that people would have to look for other ways of making decisions about investments than following insiders, such as looking at assets and what the company is doing.
What do you mean look for other ways? That's the first thing prudent investors would do... look at the financials. As far as what the company is doing, if it is doing something that only insiders are aware of, wouldn't that give an insider an unfair advantage against you?
You worried about them lacking information to do this, and I responded that insider trading laws do nothing to remedy your concern, if that's what you're worried about.
I know the current laws don't remedy my concern, but if you look at 90% of the posts, the discussion is about whether or not their should be insider trading laws to begin with.
You responded that, no, they don't, but disclosure laws do.
Yes, I went off on a tangent to answer your question, though it was pretty much completely unrelated to the discussion about whether or not there should be insider trading laws to begin with.
I then asked why you're offering this as an argument for insider trading laws, since you've just told me it's other laws that deal with what you're concerned about.
You're missing the point. If insider trading was legal, which is the topic of debate, then the disclosure laws are irrelevant. Insiders could buy/sell before they were legally obligated to disclose information.
I didn't say anything about CEOs lying.
If not, my mistake. I apologize.
As far as idiots are concerned, yes, I think that, if you see that a company is actually not doing well, and decide to buy stock simply because you see an insider doing it, you deserve to lose money, and it would be wrong for the laws to protect you.
I agree, you would have to be an idiot to buy on that alone. I never advocated it. I just made the argument that insider buying/selling doesn't improve an investor's ability to determine whether a stock is under-/over-priced. Many made the claim that the simple fact that insiders buy and sell give us some new information about how much we should pay for a stock. I said it was impossible unless you knew why the insiders were buying/selling.
M1ThinkTank: Bank credit is never extended to the company based on their stock price. It's extended based on the financial statements.
And who provides the financial statements???
M1ThinkTank: Sure, they could lie. If they wanted to go to prison. The CEO and CFO must certify quarterly statements, and they risk imprisonment if they decide to lie or withhold material information. I don't see how lying benefits them.
It benefits them now since they cannot sell their company stocks. That's precisely the point. When before, they had no such incentives to manipulate the books and conceal the real state of the firm, now that the value of their stocks depends on there own reports, the conflict of interest you complain about is created.
M1ThinkTank:As I explained in another post, each company having their own rules on insider trading would just add to the inefficiency of the market.
Open a new thread: The inefficiencies of markets vs. the efficiencies of socialism.
You tell me that bank credit depends on the stock price. I tell you it doesn't, that it depends on the financial statements. Obviously, the business provides the financial statements, but that does nothing to support your idea that bank credit is dependent on something as volatile as a stock price.
So the fact that they can go to prison and pay exorbitant fines is not enough of a disincentive to not cook the books? What am I missing?
I see how there could be a conflict of interest if the law did not exist, but it's pretty clear that the law is designed to mitigate that.
So outlawing insider trading = socialism. Gotcha.
Nice that you decide to change the topic when it's clear that (A) you have very little knowledge of finance (you thought that business contracts would depend on the stock price... really?) and that (B) you have failed to provide any good arguments in favor of keeping insider trading that I haven't been able to address.
I don't plan on opening another thread, because I'm assuming you want me to take the position that socialism is efficient. Which is not a position that I hold.
Lets say an 'insider' is optimistic about the company's performance and therefore its share value. He buys shares from the public. If the share price goes up and he sells, he makes a profit because he has judged the market conditions well. The person who bought from him is also optimistic about the performance of the stock and does not grudge the profit of the 'inside' investor. In turn, he sells for a profit, which just means someone else (another buyer) is more optimistic about that company stock than the previous two sellers. In case he errs in his judgement, and the company's stock tanks, he loses.
Lets say an 'insider' is pessimistic about the company's performance and expects its share value to drop. He bails (or shorts the stock). If his judgement is correct, he makes a profit because he has judged the market conditions well. The buyer, meanwhile, has taken a long position (or covered his shorts). If his judgement was correct, he makes a profit. If not, he loses.
All the market participants know the risk involved and trade voluntarily. Where is the need for regulation here?
The 'inside information' is a perk of working in the company whose stock you own. Information is always at a premium- that's why there is an entire industry based on information.
Also, there is supply and demand at work here. If there is a huge influx of shares for sale, price drops (also, the demand decreases). If a company has good fundamentals and the demand is high, price rises (also, supply drops since people take long positions and hold their stock). These are all generalizations, but the bottom line is that voluntary transactions need no regulations except for enforcement of contract laws.
What is the point of this? People buy stock when they are optimistic about it? No news there.
You missed the point that when he bought the stock from the public, the public might not have sold for such a low price if they had been aware of the nonpublic information. They are the ones that should be upset.
One guy has inside info. The other doesn't. Whose judgment is likely to win here? Face it, the buyer is the sucker in this transaction. He's going long based on historical financial data, the insider is going short because the company is about to have a major negative event (like a recall) that will have a material impact on future earnings. Think Toyota.
Voluntary participation doesn't take into account other important considerations, such as the cost of capital given different levels of investor confidence. If insider trading was legal, do you think that the risk premiums would be the same as they would be if it was illegal?
Inside information doesn't just get used by employees of a company. It also gets used by friends/family of the execs, who share it with their friends/family, who share it with their friends/family, etc. Basically, they don't pay for information, while other investors have to pay for a lack of it.
Not sure where you're headed with this. Except maybe to say that since people voluntarily decide to risk their capital in a market where insiders are able to maximize gains and minimize losses while other investors are left in the dust, then everything is OK.
Face it, the buyer is the sucker in this transaction. He's going long based on historical financial data, the insider is going short because the company is about to have a major negative event (like a recall) that will have a material impact on future earnings. Think Toyota.
The alternative to this being what? Say there is a lock-in period for insiders and the company's future earnings are hit hard. Since the insiders cannot cash in before the fall in share value, they have every incentive to cook the books and engage in fraudulent accounting (think Enron) in order to maintain the share value. And they'll eventually bail, making the shareholders take the loss. Anyone with such inside information has a great incentive to take advantage of it. It just cannot be prevented.
The fall out of this would be a cry for greater regulation of financial markets, causing more distortions in the market mechanisms.
In the long run, this would hurt both the "good" companies and the capital markets itself.
You might argue that the penalty for corporate fraud would be so high that it just won't be done, that companies would be transparent in reporting their losses. If that's the case, why should there be restrictions on inside trading at all? The markets would be better served by mandatory disclosures of share sales of the insiders.
This is speculation. And almost all market participants are speculators. And information is always at a premium. Information asymmetry cannot be vanquished by the wave of a regulatory wand.
What if the insider was wrong in his assessment of the information? What if the public benefited by offloading their shares to him at a higher price? That's the risk the insider takes, for which he is compensated. Much the same way, the public takes the risk with regard to non-public information.
If insider trading was legal, do you think that the risk premiums would be the same as they would be if it was illegal?
Assessments of risks are always subjective. Risk premiums are set by different investors using different models. They keep evolving. They even take into account different types of risks and weigh them differently. The only answer to that would be: it depends.
But they do pay for information. They spend time gathering that information. And friends and family build goodwill with the insider in order to gain that information. Nothing is free.
And lastly, there are such things as private contracts which the employee can sign, which will limit their ability to indulge in such transactions. If a company has a record for such shady dealings, it will not be able to attract investors who do their homework well. Reputation matters. Regulations do nothing but waste taxpayer's money on regulatory agencies, drain the wealth of companies faced with litigation costs and lawyer fees and do nothing to help the average investor. If a company does not go bankrupt due to its losses, it surely will after meeting these additional costs. Its a scenario where everyone loses, except the lawyers.
Kashyap, I wish I could reply, but it is finally time for me to get back to the grind. Being a full-time student and full-time employee, my free time is few and far between.
To all who have posted in here today, thanks for the good debate. Hopefully, I will be able to log on again sometime in the near future.
Best regards,
TANK
M1ThinkTank:You tell me that bank credit depends on the stock price. I tell you it doesn't, that it depends on the financial statements.
Stock prices are both directly and indirectly related to a firm's ability to raise new capital.
First, regarding bank credit,, stocks and other investment assets are often used as collateral to obtain bank credit. That's one direct link between prices and bank credit in general. Also, your financial statements of a firm are not some objective reports independent of stock value. The mere suggestion that they are is absurd. Stick to finance. I should have ended this conversation with you ages ago when you referred to intrinsic value, but I'll respond perhaps one final time, not for your sake.
The higher the price of a share of stock, the smaller the share of the "pie" that must be given up by present stock holders in order to raise a given sum of money. Do the math if you are such a financial wizard. This makes it more likely for share holders to approve the issue of new stock and raise new capital. There are numerous way in which this affects financial statements and the prospect of growth for the firm. Such assessments for future revenue and growth are part of what credit issuers also rely on. The ability to raise new capital at lower costs on account of higher stock value provides leverage to executives that they would not have had if stock prices would have been lower. This 'leverage' directly affects the very financial statements that you think are some objective means to assess an apparently intrinsic value or something. This has nothing do with fraud or theft. Executives can conceal the current state of affairs or distort their significance for extended periods of time on account of such leverage.
The basis for the attack on inside trading is envy, purely and simply.
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Lame choices. I don't advocate banning anything but inhaling oxygen. I sometimes slip and forget that it isn't a strictly principled person in the argument.
M1ThinkTank, I think the debate over insider trading is really a debate over more fundamental ideas. It seems to me that you don't understand the fact that value is subjective. I base this on the fact that you used the phrase "intrinsic value" in an earlier post. How can a share of stock in a given company have any intrinsic value, exactly? Of course, it can't. But hopefully you see my point.
Now along with the fact of subjective value comes the fact that no one is entitled to any particular value for anything he owns. For example, I recently bought a house. The purchase agreement contained a clause stipulating that the sale would be null and void if the house appraised for less than the agreed-upon sale price. Had this clause not been in the purchase agreement, and the house ended up appraising for less than the sale price, I wouldn't lose any money, because I never had it to begin with. Just because I happen to pay a certain price for something in no way means that, whenever I decide to sell it, the buyer is obligated to pay the same price or higher.
The same thing applies to stock markets. People forget that, when they wish to sell shares of stock, there must be one or more other people willing to buy them. Likewise, when people wish to buy shares of stock, there must be one or more other people willing to sell them. So the laws of supply and demand apply to stock markets as they do to other areas of exchange.
With that said, does it make sense to say, when no one is willing to buy what you want to sell at the price you want for it, that you're being taken advantage of? What about if you buy a product at one price, without haggling, and then you find out another person bought the same product at a lower price, because he haggled? No, it doesn't make sense either way.
The keyboard is mightier than the gun.
Non parit potestas ipsius auctoritatem.
Voluntaryism Forum
Billy Enterprise: Hey! This looks like a good place for a restaurant! I'm going to build one. I'm also going to tell all of my potential competitors that this is a great spot, and explain to them exactly why I think so! I'm no inside-trader!
(Two Days Later...)
Billy Enterprise: Shit. Someone bought that spot. This is no longer a profitable investment for me. I wonder what happened?
At what point, exactly, are you obligated to tell people when you have a potentially profitable investment?
^^ I was thinking exactly the same when reading this thread :D
(english is not my native language, sorry for grammar.)
Oh, thank god... For a moment I thought I was monopolizing the idea.
Stock prices are both directly and indirectly related to a firm's ability to raise new capital. First, regarding bank credit,, stocks and other investment assets are often used as collateral to obtain bank credit. That's one direct link between prices and bank credit in general. Also, your financial statements of a firm are not some objective reports independent of stock value. The mere suggestion that they are is absurd. Stick to finance. I should have ended this conversation with you ages ago when you referred to intrinsic value, but I'll respond perhaps one final time, not for your sake. The higher the price of a share of stock, the smaller the share of the "pie" that must be given up by present stock holders in order to raise a given sum of money. Do the math if you are such a financial wizard. This makes it more likely for share holders to approve the issue of new stock and raise new capital. There are numerous way in which this affects financial statements and the prospect of growth for the firm. Such assessments for future revenue and growth are part of what credit issuers also rely on. The ability to raise new capital at lower costs on account of higher stock value provides leverage to executives that they would not have had if stock prices would have been lower. This 'leverage' directly affects the very financial statements that you think are some objective means to assess an apparently intrinsic value or something. This has nothing do with fraud or theft. Executives can conceal the current state of affairs or distort their significance for extended periods of time on account of such leverage. The basis for the attack on inside trading is envy, purely and simply.
This whole post is comical. Just give up.
Nice strawman about the financial statements. I've said a million times in this thread that they were important for the stock price. Also, intrinsic value is real. It is what stockholders would pay for a stock if they could accurately predict all future cash flows. Of course, this is impossible to do, but material information (such as financial statements) about a company will greatly skew people's opinions about a firm's intrinisic value. As a result, material information that is made public causes great shifts in the stock price. Guess who gets in the door first, when material information is nonpublic? Finally, banks aren't loaning based on the stock price, they are loaning based on the company's ability to repay. I guarantee you that they are not looking at the stock price, not ever.
As for the part about the size of the pie and the stock price.... hahahahahahah. The share price has absolutely nothing to do with the size of the pie that must be given up when the firm issues new stock. It has to do with the number of shares outstanding, so save your ad hominems about financial wizards for yourself. As a simple math example, if a firm has one share of stock worth $1 trillion, and they issue one new share, they give up 50% of the company. If a firm has 100 shares worth $1 each, and they issue one new share, they give away less than 1%. As you can see, stock price is totally irrelevant here. Besides that, I see you are making the case that executives can lie for extended periods of time without penalty. Again, Sarbanes Oxley. I'm tired of beating that dead horse.
Last, nice to see you close with another ad hominem. The last resort of a failed argument. You've made no good points, and even tried to use some false arguments against me (like claiming I didn't know that financial statements affect the stock price... I've said the exact opposite multiple times in this thread).
Pleae stop wasting my time by claiming to have an idea about finance when you have proven time and time again that you do not. Here's a list of your incorrect statements if you are unsure of your lack of knowledge:
Of course, you'll try to shift your arguments to make them seem more legitimate, but the fact that you remains that you actually tried to make these arguments, all the while telling me that I don't know about finance. Laughable.
Kashyap,
Seeing that you still only have two posts, I suspect you are a second account for someone else that has posted in this thread. Strange how you create an account, make two posts in this thread, and then never post again.
I've already answered all of your arguments in this thread, so please read the rest of the thread if you want to know my position on those issues. I'm sure it will be your second time reading them.
M1ThinkTank:Kashyap, Seeing that you still only have two posts, I suspect you are a second account for someone else that has posted in this thread. Strange how you create an account, make two posts in this thread, and then never post again.
It is not a second account. There are tons of articulate lurkers here. Your posts were begging for a rebuttal, you seem to fundamentally misunderstand libertarianism and Austrian economics.
I understand that value is subjective. I also understand that a share of stock has intrinsic value. It has intrinsic value based on the company's ability to make money. If you were Nostradamus, and you could accurately predict a company's future cash flows, you would know that company's intrinsic value. Investors are not Nostradamus, but they try to be. As a result, when material information is made public, stock prices can shift dramatically in one direction or another because investor perceptions about intrinsic value change dramatically.
In short, intrinsic value is legitimate, since it is what investors are trying to estimate. They predict future cash flows, discount them according to a required rate of return, and hope that their assessment of intrinsic value is correct.
Thank you for stating the obvious. As for your first sentence, it is wrong in the case of insiders. If they could trade freely on nonpublic information, then they would almost always be entitled to much better prices for their stock than the average investor.
Again, thank you for stating the obvious. I already stated way earlier in the thread that this was true. But you neglect to mention that supply and demand is greatly impacted by the release of material information about a company. When nonpublic material information about heavy losses is used when an insider sells stock, he is selling when demand is based on public information. When that nonpublic material information is made public, all other investors must sell when supply and demand is based on the new information. In other words, they take a loss, the insider takes a profit (or mitigates losses).
In effect, insiders can make trades ahead of predictable shifts in supply and demand for a profit. (the shifts are only predictable to them, not to outsiders)
Apples to oranges. In one case, someone is using negotiating skill to get a better deal. In the other case, someone is using nonpublic info to get a better deal. It has nothing to do with their investing acumen, just their access to information.
And, if true, how does this make my arguments about insider trading invalid?
I get the impression that the concept of insider trading seems to be predicated on what can best be described as a "fair game" premise.
That is the stock market is supposed to be accessible to the public and everyone should get a fair shake in terms of stock selection and therefore everyone has a right to equal information.
One of my econ professors talked about a market for used cars he talked about lemons, he then said it happens in other markets and talked about lemon stocks. I guess one can imagine someone selling a stock just before announcing the company is declaring bankruptcy or something.
I don't really agree with the "fair game" premise.
Billy Enterprise: Hey! This looks like a good place for a restaurant! I'm going to build one. I'm also going to tell all of my potential competitors that this is a great spot, and explain to them exactly why I think so! I'm no inside-trader! (Two Days Later...) Billy Enterprise: Shit. Someone bought that spot. This is no longer a profitable investment for me. I wonder what happened? At what point, exactly, are you obligated to tell people when you have a potentially profitable investment?
Obviously, you don't share information about potentially profitable investments until those investments are made. I never said the company should be disclosing information that would hinder their ability to be competitive.
In fact, if you had actually read the thread, the debate is about whether or not insider trading should be legal. So the real question is, should Insider Joe be able to buy tons of shares from Average Investor Bob at a discount because Joe knows the company is about to buy some prime commercial real estate?
M1ThinkTank:And, if true, how does this make my arguments about insider trading invalid?
If it relies on "intrinsic value" then it is invalid. Value is subjective.
M1ThinkTank:In fact, if you had actually read the thread, the debate is about whether or not insider trading should be legal. So the real question is, should Insider Joe be able to buy tons of shares from Average Investor Bob at a discount because Joe knows the company is about to buy some prime commercial real estate?
Why shouldn't he?
Libertarians don't particularly care about legal. They care about lawful.
I get the impression that the concept of insider trading seems to be predicated on what can best be described as a "fair game" premise. That is the stock market is supposed to be accessible to the public and everyone should get a fair shake in terms of stock selection and therefore everyone has a right to equal information. One of my econ professors talked about a market for used cars he talked about lemons, he then said it happens in other markets and talked about lemon stocks. I guess one can imagine someone selling a stock just before announcing the company is declaring bankruptcy or something. I don't really agree with the "fair game" premise.
One can imagine? It would be a certainty if insider trading were legal. It would be irrational for an insider to hold onto a stock that he knew was worthless.
The market for used cars is completely unrelated to the market for stocks. There are other factors to consider in the stock market that these oversimplified analogies ignore. One of them is the cost of capital. It would be higher if people suspected that insiders could rake in excess economic profits by trading on inside info.
That's actually the one thing I don't understand. I would assume that most people here would be in favor of perfectly competitive markets (which I absolutely am), but everyone seems to defend insider trading, which is essentially the same as having a monopoly on information.
People here hate copyright laws because it allows the holder of the copyright to charge higher prices than they would otherwise. Yet they love insider trading, which allows the holder of the inside information to charge higher prices than they would otherwise.
Mind boggling.
M1ThinkTank: It's not a question of first X amount of people investing with inside information, and then all of a sudden Y amount of people (the rest of the investing community) all of a sudden simultaneously investing their money in that stock. Trading in general doesn't work that way. It is snow ball effect; otherwise, prices wouldn't gradually change, they would suddenly reflect the final aggregate amount of money chasing that particular company's stock. There's different levels of investors, each investing when they receive enough information (either through the price mechanism or through "inside trading"). But the CEO is not the inside trader. The inside trader is the CEO's buddy, who because of the fact that they cashed out, they transmit that information to other investors through falling prices. Instead of everyone losing all of a sudden, the fall takes place gradually. I don't know why you stubbornly refuse to believe that the CEO can be an inside trader in a world where inside trading was legal. Further, you refuse to acknowledge that the CEO could sell first, it always has to be his buddy for some reason. Last, stock prices can fall pretty quickly once new information goes public. Look at how investors in CSCO reacted to the company's latest earnings report. The fact is, if insider trading was legal, the CEO and other select owners of the stock could sell their shares before the earnings information was public, allowing them to both to (1) sell their stock before it drops and (2) screw over whoever bought the stock with a capital loss. Inside trading is about those who knows the CEO's intentions, in this highly unlikely and mythical scenario of yours. The CEO will always be familiar with his own plans and intentions. You can't illegalize that. It would be like illegalizing breathing. Inside trading is what softens the blow. Of course the CEO knows his own plans and intentions. I suggested a scenario where the CEO sold his shares without telling anyone why he was selling. In other words, they could not possibly know his intentions if he did not share them. For instance, imagine the CEO of CSCO sold his shares a few weeks before the most recent earnings were posted without telling anyone why. All investors who knew he had sold would have to speculate on his intentions. The case would be hardly different if he told 24 other insiders that earnings would suck, and the group of 25 collectively sold their shares without telling anyone why. Other investors, again, have to guess why the insiders have sold. The insiders know why... earnings are not going to be so good, which will knock down the stock price. Only thing is, they get to sell before that information is public knowledge.
It's not a question of first X amount of people investing with inside information, and then all of a sudden Y amount of people (the rest of the investing community) all of a sudden simultaneously investing their money in that stock. Trading in general doesn't work that way. It is snow ball effect; otherwise, prices wouldn't gradually change, they would suddenly reflect the final aggregate amount of money chasing that particular company's stock. There's different levels of investors, each investing when they receive enough information (either through the price mechanism or through "inside trading").
But the CEO is not the inside trader. The inside trader is the CEO's buddy, who because of the fact that they cashed out, they transmit that information to other investors through falling prices. Instead of everyone losing all of a sudden, the fall takes place gradually.
I don't know why you stubbornly refuse to believe that the CEO can be an inside trader in a world where inside trading was legal. Further, you refuse to acknowledge that the CEO could sell first, it always has to be his buddy for some reason. Last, stock prices can fall pretty quickly once new information goes public. Look at how investors in CSCO reacted to the company's latest earnings report. The fact is, if insider trading was legal, the CEO and other select owners of the stock could sell their shares before the earnings information was public, allowing them to both to (1) sell their stock before it drops and (2) screw over whoever bought the stock with a capital loss.
Inside trading is about those who knows the CEO's intentions, in this highly unlikely and mythical scenario of yours. The CEO will always be familiar with his own plans and intentions. You can't illegalize that. It would be like illegalizing breathing. Inside trading is what softens the blow.
Of course the CEO knows his own plans and intentions. I suggested a scenario where the CEO sold his shares without telling anyone why he was selling. In other words, they could not possibly know his intentions if he did not share them. For instance, imagine the CEO of CSCO sold his shares a few weeks before the most recent earnings were posted without telling anyone why. All investors who knew he had sold would have to speculate on his intentions.
The case would be hardly different if he told 24 other insiders that earnings would suck, and the group of 25 collectively sold their shares without telling anyone why. Other investors, again, have to guess why the insiders have sold. The insiders know why... earnings are not going to be so good, which will knock down the stock price. Only thing is, they get to sell before that information is public knowledge.
Yes, it is subjective, in the sense that it is an estimate of intrinsic value.
The fact remains that investors are trying to accurately estimate a stock's intrinsic value, which, again, is the price you would pay for the stock if you had all information about that company's future cash flows.