PrepTest 80, Section 4, Question 19
Passage A
Insider-trading law makes it a crime to make stock transactions, or help others make stock transactions, based on information you have ahead of the general public because of your special position within a company.
However, trading based on information you have that everyone else doesn't—isn't this part of the very definition of a functioning stock market? The entire field of stock brokering is based on people gaining knowledge that others don't have and then using it to profit themselves or their clients. If you analyze a stock, decide that it is overvalued, and sell it, you are taking advantage of knowledge that many others don't have. That doesn't make you a criminal; it means you've done your homework.
Stock markets work best when all the relevant information about a company is spread as widely as possible, as quickly as possible. Stock prices represent a constantly shifting amalgamation of everyone's information about and evaluations of a company's value. It helps when those who have accurate information about changing circumstances are permitted to act so that stock prices reflect them.
Someone selling a stock because they know something will happen soon that will lower the stock's value helps spread the knowledge that the price ought to be dropping. Such actions help ensure that stock prices do reflect a more accurate assessment of all the relevant facts. That's good for everyone in the stock market.
When contemplating insider-trading law, it helps to consider a far more widespread practice: "insider nontrading"—stock sales or purchases that would have been made, but aren't because of inside knowledge. This is certainly happening every day, and rightfully so. No one would think to lock someone up for it.
Passage A
Insider-trading law makes it a crime to make stock transactions, or help others make stock transactions, based on information you have ahead of the general public because of your special position within a company.
However, trading based on information you have that everyone else doesn't—isn't this part of the very definition of a functioning stock market? The entire field of stock brokering is based on people gaining knowledge that others don't have and then using it to profit themselves or their clients. If you analyze a stock, decide that it is overvalued, and sell it, you are taking advantage of knowledge that many others don't have. That doesn't make you a criminal; it means you've done your homework.
Stock markets work best when all the relevant information about a company is spread as widely as possible, as quickly as possible. Stock prices represent a constantly shifting amalgamation of everyone's information about and evaluations of a company's value. It helps when those who have accurate information about changing circumstances are permitted to act so that stock prices reflect them.
Someone selling a stock because they know something will happen soon that will lower the stock's value helps spread the knowledge that the price ought to be dropping. Such actions help ensure that stock prices do reflect a more accurate assessment of all the relevant facts. That's good for everyone in the stock market.
When contemplating insider-trading law, it helps to consider a far more widespread practice: "insider nontrading"—stock sales or purchases that would have been made, but aren't because of inside knowledge. This is certainly happening every day, and rightfully so. No one would think to lock someone up for it.
Passage B
One of the basic principles of the stock market is transparency. In a transparent market, information that influences trading decisions is available to all participants at the same time. Success in the market can then be gained only by skill in analyzing the information and making good investing decisions. In a transparent stock market, everyone has the same chance of making a good investment, and success is based on individual merit and skill.
In insider-trading situations, some people make investment decisions based on information that other people don't have. People who don't have access to the inside information can't make similarly informed investment decisions. That unfairly compromises the market: people with inside information can make informed trade decisions far before everyone else, making it difficult or impossible for other people to earn money in the stock market.
This, in turn, causes a loss of investor confidence and could ultimately destroy the market. People invest in the stock market because they believe they can make money. The whole point of capital investments is to make good investing decisions and make money over time. If investors believe they can't make money, they won't invest. Undermining investor confidence would thus deny companies access to the funds they need to grow and be successful, and it could ultimately lead to widespread financial repercussions.
Passage A
Insider-trading law makes it a crime to make stock transactions, or help others make stock transactions, based on information you have ahead of the general public because of your special position within a company.
However, trading based on information you have that everyone else doesn't—isn't this part of the very definition of a functioning stock market? The entire field of stock brokering is based on people gaining knowledge that others don't have and then using it to profit themselves or their clients. If you analyze a stock, decide that it is overvalued, and sell it, you are taking advantage of knowledge that many others don't have. That doesn't make you a criminal; it means you've done your homework.
Stock markets work best when all the relevant information about a company is spread as widely as possible, as quickly as possible. Stock prices represent a constantly shifting amalgamation of everyone's information about and evaluations of a company's value. It helps when those who have accurate information about changing circumstances are permitted to act so that stock prices reflect them.
Someone selling a stock because they know something will happen soon that will lower the stock's value helps spread the knowledge that the price ought to be dropping. Such actions help ensure that stock prices do reflect a more accurate assessment of all the relevant facts. That's good for everyone in the stock market.
When contemplating insider-trading law, it helps to consider a far more widespread practice: "insider nontrading"—stock sales or purchases that would have been made, but aren't because of inside knowledge. This is certainly happening every day, and rightfully so. No one would think to lock someone up for it.
Passage B
One of the basic principles of the stock market is transparency. In a transparent market, information that influences trading decisions is available to all participants at the same time. Success in the market can then be gained only by skill in analyzing the information and making good investing decisions. In a transparent stock market, everyone has the same chance of making a good investment, and success is based on individual merit and skill.
In insider-trading situations, some people make investment decisions based on information that other people don't have. People who don't have access to the inside information can't make similarly informed investment decisions. That unfairly compromises the market: people with inside information can make informed trade decisions far before everyone else, making it difficult or impossible for other people to earn money in the stock market.
This, in turn, causes a loss of investor confidence and could ultimately destroy the market. People invest in the stock market because they believe they can make money. The whole point of capital investments is to make good investing decisions and make money over time. If investors believe they can't make money, they won't invest. Undermining investor confidence would thus deny companies access to the funds they need to grow and be successful, and it could ultimately lead to widespread financial repercussions.
Passage A
Insider-trading law makes it a crime to make stock transactions, or help others make stock transactions, based on information you have ahead of the general public because of your special position within a company.
However, trading based on information you have that everyone else doesn't—isn't this part of the very definition of a functioning stock market? The entire field of stock brokering is based on people gaining knowledge that others don't have and then using it to profit themselves or their clients. If you analyze a stock, decide that it is overvalued, and sell it, you are taking advantage of knowledge that many others don't have. That doesn't make you a criminal; it means you've done your homework.
Stock markets work best when all the relevant information about a company is spread as widely as possible, as quickly as possible. Stock prices represent a constantly shifting amalgamation of everyone's information about and evaluations of a company's value. It helps when those who have accurate information about changing circumstances are permitted to act so that stock prices reflect them.
Someone selling a stock because they know something will happen soon that will lower the stock's value helps spread the knowledge that the price ought to be dropping. Such actions help ensure that stock prices do reflect a more accurate assessment of all the relevant facts. That's good for everyone in the stock market.
When contemplating insider-trading law, it helps to consider a far more widespread practice: "insider nontrading"—stock sales or purchases that would have been made, but aren't because of inside knowledge. This is certainly happening every day, and rightfully so. No one would think to lock someone up for it.
The passages' references to the analysis of information about stocks (second-to-last sentence of the second paragraph of passage A, second-to-last sentence of the first paragraph of passage B) are related in which one of the following ways?
Passage A presents it as unnecessary, since all relevant information is already reflected in stock prices, whereas passage B presents it as necessary for making sound investment decisions.
Passage A uses it as an example of an activity that compensates for the market's lack of transparency, whereas passage B uses it as an example of an activity whose viability is conditional upon the transparency of the market.
Passage A presents it as an activity that gives some investors an unfair advantage over others, whereas passage B presents it as an activity that increases the transparency of the market.
Passage A presents it as comparable to the acquisition of inside information, whereas passage B contrasts it with the acquisition of inside information.
Passage A treats it as an option available only to brokers and other stock-market professionals, whereas passage B treats it as an option available to ordinary investors as well.
Explanations
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