What is Insider Trading Abuse?

What is Insider Trading Abuse?

It is important to clarify what actually is insider trading we read and hear about so much in the headlines. Much is actually misinformation that feeds on the anti-Wall Street sentiment the media loves to spew.

It is difficult to accuse individuals of being guilty of insider abuse unless you make some basic distinctions. I do this by first distinguishing what is abuse of proprietary information, and what information is being ferreted out by legal securities analysis.

A way of investigating the insider trading concept: If you get the information from someone who is under a contract from his or her employer not to divulge information received while on the job, it is stolen insider information. If you do your own analysis to get the information, your information is legal.

The Regulation Of Derivatives

More regulation of derivatives is being contemplated by Washington, whereby trades will have some form of collateral and will include margin. What was transacted in the past obviously did not work satisfactorily. But then, there was little regulation, nor collateral required.

There is no doubt that derivatives are essential to trading of securities for any orderly financial securities market. Derivatives are financial instruments derived from other assets, instead of trading the underlying asset itself. One basic example is a futures contract: An agreement to exchange an underlying asset at a future date.

Derivatives are frequently leveraged, so that a small movement in the underlying value can cause a large difference in the value of the derivative.

They can be used to speculate for profit or to hedge in order to reduce risk in that underlying asset.

Regulators are attempting to create more collateral backing for these contracts, to avoid past problems. This makes theoretical sense.

But I wonder how practical such efforts will be, as the nature of derivatives may make such restrictions too binding to be practical.

Be Careful Of Currency Speculation

Some advisers , columnists and brokers make currency speculation and trading sound easy. But it is not.

Currency trading is not for the faint-hearted. And it can be dangerous to your financial health unless you have lots of capital. And know-how.

Secondly, Currency trading success depends on trends that can be reversed suddenly. Quick changes can blip out equity when down payment margins are so small in commodity contracts.

And thirdly, value in a currency is not easily discerned, even by experts. A currency is valued in relation to another. The dollar, in relation to the British pound, the Euro, the Chinese yuan and the Japanese yen, as examples. And they can be temporarily overvalued or undervalued by volatile markets.

I would suggest any investor who would like to trade currency first become a student of this highly complicated game. That means that one must first read all that they can about the subject’s mechanics.

That also requires knowledge of the futures markets and all those intricacies. Read the literature available on the internet and from organizations that comprise the options industry,

And once you feel you know those technicalities, do sessions of what I refer to as “dry-runs.” Make fantasy trades without real money just to see approximately how well or poorly you would have fared with actual investments.

Only then do you trade. With your fingers crossed.

Do Professional Investors Attempt to Use Too Much Data?

Wall Street financial models have been able to resort to what is known as data mining. Whereby information on various investing strategies of the past are collected. This is called back-testing when the strategies used in the past are used to see what would happen, hypothetically, as a strategy, when projected into the future.

All this is based on many assumptions that the mathematical models are supposed to predict.

I have made a career of looking at over 1,600 investment strategies used by investors over the years. I have investigated their pros and cons.

And I can tell you this: There are some worthwhile concepts as well as gibberish out there. But all in all,no panacea exists. I would say that most of the data mining is useless, except for their use to market investment management services.

Financial Problems in State Governments

State governments have budget problems that are unique to them. Unlike Uncle Sam, states cannot print money. Yet, their political overseers have the same bad habits of spending too much.

One major example: Expensive pensions, especially when they are not properly funded, if funded at all

These recession days, states’ tax revenues are lower which make their financial burdens even more onerous. Business tax incentives have not worked out and Income taxes on business and individuals are too high for them to be easily raised. It is becoming more difficult to keep looking for this source of easy state revenue.

The solution? States will have to cut back much of what they are now offering, and begin tightening their belts. This includes resisting federal mandates that require spending by edict from Washington.

Indexed CDs are Back Again

Certificates of deposit, with returns tied to the stock market, are back again. As in the past. A Reminder: Investment instruments of this kind really are too complicated for the average investor. They serve a purpose primarily for brokers who market them and not the true interest of investors.

If you want simplicity without headaches, you are always better off with plain-vanilla investments. Forget about the sharp-pencil boys who come up with the complicated stuff on Wall Street. If you want stocks or bonds buy them. If you prefer CDs, choose them. Avoid indexed CDs unless you really understand their terms..

Mixing the two in combination can be done in a portfolio, not as a package that can complicate your planning.

A Super Regulatory Agency?

I have said in the past that strict government regulation by itself does not work. However, one problem we have is we may have too many agencies working with conflicting objectives.

A suggestion with possible merit might be to have the Federal Reserve in charge of all the banks and insurance companies, instead of the various agencies now supervising the many institutions. There is also a question of SEC duties and how hedge funds are kept under control, and whether they, too, ought to be under that all-in-one supervisor.

Transparency always works best. However, that is also a matter of political talk more than practice. Transparency is what politicians mention only in their campaign banter.

A better look at the balance sheets of public companies would be of help. More legislation such as the Sarbanes-Oxley Act is not the answer. The latter legislation has been an expensive failure because it has not done what the politicians wanted, apart from keeping many foreign businesses away from American shores.