Open Term Paper Example | Topics and Well Written Essays - 3750 words

Open - Term Paper Example Investors are always looking for strategies through which they can generate higher return on their investment whether that particular strategy falls within the domain of any particular theory or not. Through this paper a unique method of increasing the investor’s return is analyzed, i.e. by following the transaction pattern of a director of the corporation. The directors in corporations all around the globe are actively involved in insider trading of their shares, and being on a strategic position they are well aware of the future outlook of their company. It is a general notion that the directors of the company are able to generate profits by selling the shares of the company and this paper tries to provide empirical evidence for it. The paper has two primary objectives: (1) Whether directors are able to generate abnormal gain through insider trading of the shares, as suggested by various economists and financial analyst (based on American Stock Market) (2) Can individual and corporate shareholder can also earn good return by following in the footsteps of the directors. In the world of economics and finance, when it comes to financial malpractices, insider trading tops the list. Insider trading is one of the most notorious financial crimes being practiced by managers, directors and other employees all around the globe. Insider trading can be defined as the buying and selling of a security by an individual who has direct and reliable access to the non-public information about the security. Insider trading is not always considered as a malpractice or illegal and is subjective to the underlying intention to the transaction. The statement can be further elaborated by considering the fact that if the trader is reaping profits on the basis of such information which is not being public yet, then the insider trading transaction is illegal. In addition, insider trading does not always mean that buying and selling of security is taking place. Providing confidenti al information to a third party, in exchange of monetary or any other form of consideration, is also illegal. The practice of insider trading is not confined to Directors of any corporation but the practice also prevails among brokers and even the family members of the directors. Although, once the information is public, the inside transaction is not illegal as the parties involved does not derive any unfair advantage over the general public. Media has made the masses at general knowledgeable with the passage of time and they have also equipped themselves with the technicalities of insider trading especially after the cases of Enron and Martha Stewart. The Securities and Exchange Commission of USA has adopted the practice of enforcing strict and practical guidelines which distinguishes legal and illegal trading of the shares by the inside people. Insider trading is not a recent or a latest money making gimmick which has been exploited by the directors and managers to earn higher ret urn. The history of insider trading dates back to the great depression as well. The securities and exchange commission of the United State has made it compulsory for the key management personnel and other officers of the company. Insider trading creates impact on the share price of the corporation to which the transaction