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Inside Trading

According to the article “The Fine Line between Legal, and Illegal, Insider Trading” by Peter (2012), insider trading can be either legal or illegal. However there is a fine line between the two, and therefore it remains hard to differentiate. The cases of insider trading keep coming up, where corporate officers are put under scrutiny for the crime. Peter (2012) gives an example of insider trading case that involved a retailer by the name Big Lots whereby its chief executive, Steven Fishman, sold stock worth $10million. The following week after the sale of such shares the company reported a loss. This caused the stock prices to go down by 25%. The CEO then in a week's time announced his resignation. Such act warrants a lawsuit that will focus on the company anticipated loss before the sale of the shares. According to Peter (2012) this case and many more others shows how insider trading is a prevalent problem in the United States despite the existence of law to differentiate between legal and illegal insider trading. The existing laws regarding insider trading were meant to protect employees (insiders) from any action of benefiting unfairly from the corporate information that is yet to be released in the public domain. The insiders will continue to run a risk if they buy a stock from their company and it later emerges that they had prior knowledge.

The U.S Security and Exchange Commission (S.E.C) came up with Rule 10b5-5 in the year 2000 to provide guidelines on how insiders can engage in trade involving the company shares (Peter, 2012). This rule offers corporate officers a chance to trade in stocks without any fears of a future fraud charges in securities. The rule outlines a plan in which the insider can buy or sell the company shares if he does not possess insider information. Following the plan, as outlined by Rule 10b5-5 can be considered as a legal insider trading. Nevertheless, the executives can manipulate the Rule 10b5-5 plans by taking advantage of the inside information. This is because the plans can be implemented any time and can be modified once adopted. Additionally, the rules do not make a person committed to continuing with the trade because the plan can be canceled at will. Therefore, a corporate officer can take advantage of any expected changes to the fortunes of a company. However, the plans work as it does not mean if one had followed the plan the S.E.C cannot institute a lawsuit (Peter, 2012). Any affected employee can, therefore, use the plan as a defense to show that by the time the plan was transacted he or she had no inside information about the company.

This article applies to the context of the personal financial planning. This is because it helps to clarify on when a person engages in the illegal or legal insider trading. In terms of personal financial planning the information on how to trade when one is an employee is critical to the individual. When deciding to buy shares as an employee one has to follow the Rule 10b5-5 plans which are important in the personal financial planning. This is because following the plan can enable one to have proper financial planning by avoiding the loss of the stock transaction in case he or she is accused of insider trading.

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Turbulence of Stock Market

The article “Why the Stock Market Is So Turbulent” by Neil (2015) explains why the stock market remains unstable currently. The turbulence started in China and later spread to other major markets such as the European and the American markets. The instability of the stock markets can be blamed on the fluctuation of the prices. The oil market remains unstable across the world, and it is having a far-reaching impact on other sectors of the economy. Neil (2015), starts by stating and explaining the drop that the Shanghai composite index recorded. The drop was reported to be 8.5%, and such decline spread to other stock markets globally. For instance, in the United States, the stock traders experienced a volatile trading day whereby the stock index went down by 3.9% during the same time (Neil, 2015). When the oil prices started declining the United States rushed to secure its treasury bonds.

In China, the stock market is an important investment as most people in the middle-class have turned to this sector of the economy. The falling stock prices will, therefore, have a devastating impact on the economy and individual financial plans. At the time of the drop in share prices the Chinese economy was struggling to transits from export and investment depended on economy to one that is more sustainable (Neil, 2015). The Chinese stock markets seemed extremely promising for the investors due to its rise in the first few years, but the decline came as a shock to many.

The decline in the Chinese stock markets did not only affect China and another big market as it had a negative impact on the emerging markets such as Malaysia and Mexico (Neil, 2015). Many global investors who have turned into emerging markets to invest in stocks have been affected by the decline in a negative manner. The oil prices affect the stock market because when oil prices drop or increase the prices of almost all the products will be affected. This effect on the prices of products will have an impact on the profitability of the company and thus impacting the stock markets.

Despite such decline in the shares in China as well as in another top market, the United States Federal reserves were confident in the domestic economy because they were keen on raising the interest rates. However, economic experts are warning that the increase in interest rates may have an impact on the economy and stock markets (Neil, 2015). The stock and other investors are therefore at the risk of an economic downturn.

This information about the current plummeting stock markets is important in personal financial planning because its gives vital information on the risk involved in investing in such sector. If one is deciding to avoid financial stability by investing in stock, then it means that this is not the right way to follow when doing personal financial planning. Personal financial planning requires one to make important decisions on investments. The information about the decline in stock markets in the major economies across the world means that stock markets can have a devastating impact on one's financial plans. Therefore, the article applies to personal financial planning because it serves as a warning for an individual intending to invest in stocks.

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Stock Evaluation

The article "Evaluating a Stock" by Anonymous (2016) gives insights on what to consider before purchasing a stock. The most important factors that investors considers before investing in stock include stock's valuation, plans for diversification, strategy and the risk involved. However, people use different methods to evaluate a stock. For instance, the value of a stock can be determined by considering the earnings of a company. This is because when one buys stock, it means that he or she is acquiring a stake in the company. It is, therefore, important to consider the company's profitability because it is not advisable to buy shares of a sinking company. The money made by a company can be a determinant of how much to invest. If a company makes more profit it is, therefore, wise to buy more shares (Anonymous, 2016).

Once a person buys shares he or she can get rewarded in various means. One of the ways is receiving a share of the company by receiving dividends. This method is common with big companies that have been successful. Another way one can benefit from investing in shares is the appreciation of a share value. The share value can appreciate mostly when a company does not give dividends but reinvests the profit so as to expand the company (Anonymous, 2016). When the profit is reinvested in the company, the firm will grow and so does the value of the shares. The investors will benefit by having their shares appreciate in value. This is common with small and fast growing companies.

One of the most common measures of the value of stocks is the ratio of the price to the earning (P/E) (Anonymous, 2016). This means that the share price is divided by the annual net income of the company. Those stocks that have a higher P/E than the P/E of the broader market are considered expensive. On the other hand, those stocks that have a P/E that is below that of the market are mostly considered to be cheaper. The P/E has for long been criticized as it is not considered as a perfect measure of the value of the stocks. This is because those small companies that are growing fast have a high P/E due to their little earning and high stock prices. Additionally, a big company may have low P/E as a result of anticipation of a decline in its earnings (Anonymous, 2016). Therefore, a stock may be perceived negatively due to its low P/E as a result of various market parameters and such may not represent the true value of such stock.

There are other measures that are used in stock evaluations. These include the following: price-to-sales, price-to-book and the dividend yield (Anonymous, 2016). These measures are simple as one needs to relate the stock price to a given market parameter. Those investors who venture in stock markets sometimes consider those stocks that have higher returns than the market. It is, therefore, important to evaluate a stock before purchasing it.

The article by Anonymous (2016) has an application for the personal financial planning. In personal financial planning one may decide to invest in stocks. It is therefore important for such person to consider those stocks that are doing better and the company needs to have high earning. If one selects such companies he will be able to realize a positive result in the personal financial planning.

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