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But if the participant or an agent of the participant acts on the information, the market is thrown out of equilibrium and becomes inefficient because of the information. Insider trading, therefore, requires two components: the presence of a participant who is able to act or cause another to act; and, the presence of nonpublic information which would affect the price of a security or commodity were the information generally available. The participant is generally referred to as an "insider," and the information is referred to as "material." Generally, "insiders" are held to be directors, officers and managers of a company, and "material" information is considered information that a reasonable investor would consider significant in determining whether to buy, sell or hold a particular security (Weinberger, 1990, p. 181). At this juncture, the argument for regulating insider trading would make sense. If all material information is available to all investors or potential investors, then no one investor has an advantage over the other, and there can be no artificial manipulation of the market based on the material information available to them. Items which have been held to be material involve the pending sale of a company, upcoming litigation, new products, or a change in personnel. An individual who learns that one company is planning to take over another might purchase stock in the target company. Th |
