News Tristan on 17 Dec 2008 08:22 pm
Insider Dealing vs Insider Investing
I watched the film Wall Street again last night and found it fascinating. I think the first time I watched the film was when I was a teenager, and didn’t understand any of the financial jargon being used and how it effects the characters in the film. Now that I’m an adult and have learned about these things, I found the film even better!
What struck me as an interesting notion in the film is the way Charlie Sheen’s character, Bud Fox is trying to get ahead by studying charts and projections for various companies whereas Michael Douglas’s character, Gordon Gekko pretty much ignores this information and relies almost exclusively on “tips” or information that he acquires from “moles” within the companies he is targeting.
Now in real life, this would be deemed to be “insider trading”, and is in breach of stock market rules. This is because the notion of the stock market is that the companies are “public” companies and so all information that could affect the companies’ stock market price has to be announced publicly. By circumventing this rule, if you find out information that may positively or adversely affect the share price, you can make a play with your shares and take advantage of the situation.
The thing that struck me most with this, is that in private limited companies, the opposite is true – in fact all share dealing in private limited companies is in effect insider dealing as there is no public exchange for private limited companies.
So if insider dealing is outlawed in public stock exchanges, as it can give those who have access to inside information an unfair advantage, then why is it that this is the only way of dealing in private limited companies? And does it mean that if you want to make serious money, you should discount investing in large, public companies and instead opt for small, private companies, where you can get access to inside information and much more easily take control of the business?
I think it depends on your attitude to risk and your level of experience. As I said in my post about good investment ideas yesterday, the best investment you can make is in yourself and your understanding of business.
