Question

On behalf of your client, you purchased 10,000 shares of publicly-traded Company A stock six months ago for $22.00 per share. Today (before news of the coronavirus), the stock is trading at $23.20. You just heard from your reporter friend that this thing called “coronavirus” is about hit worldwide. The rest of the world will hear about it in a few hours when your friend posts her story online. You quickly re-calculate the future cash flows of Company A based on the impact the virus may have on the company’s future earnings. Your new calculation of Company A:

• Equity Value is $5,322 million US dollars

• Company A has 325 million shares outstanding You have two hours before the world finds out about the coronavirus.

What should you do with respect to your shares of Company A and why? Justify your answer.

Answer 1

You should not sale the shares though you have recieved the information well before rest of the world, It is non ethical to trade based on the non public but material information. That means it is non ethical to take trades using the non public and stock sensitive information.

As per new equity value new share price would be $16.38 (5322/325), Means stock will fall to $16.38 once the information becomes public.

So you have to wait till the information regarding available to whole world once the information is out you can trade as it will give other traders fair grounds to trade.