What are the costs and benefits of prohibiting insider trading? Trading is how p

Question

What are the costs and benefits of prohibiting insider trading? Trading is how prices come to reflect all material information about a company's prospects. By restricting a set of investors from trading, we decrease the efficiency of the prices because it will take longer for the prices to reflect that private information. We rely on efficient prices to make sure that capital is allocated to its best use. In order for a capital market to fulfill its function, uninformed investors must be willing to invest their money-providing liquidity and lowering the cost of capital. If investors thought that the stock market was just a fool's game where they lost to insiders, they would be unwilling to invest or would price their expected loss into their required return. This increases the cost of capital for companies and slows economic growth. The main cost of prohibiting insider trading is the inability for outsider traders and investors to realize how the companies are doing and where they are heading.

Explanation / Answer

Answer:

I would like to explain insider trading in my own words whereas Insider trading is something which is illegal in the eyes of law . It is a means of getting an confidential information which is private and on which it would affect the stock market and volatitlity of the share would hit badly. Example : company is planning to issue dividend:

Therefore The main benefits of prohiting the insider trading is that the investors rely on efficient prices to make sure that the capital is allocated to its best use.

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