The Jewish Ethicist - Smart and Rich
It's okay to profit from superior knowledge if it was fairly obtained.
Q. Stock picking means finding and buying undervalued shares. Isn't this taking advantage of the buyers' ignorance?
A. While Jewish law does include many regulations ensuring fair prices, the overall approach is that commerce is not a "zero sum" game. In a good exchange both sides benefit, and the fact that the buyer wins doesn't mean the seller loses.
One fascinating expression of this approach is found in the laws of vows. The mishnah states that if a person has vowed (perhaps in a fit of pique) not to obtain any benefit from another person, then he is forbidden both to sell to and also to buy from that person. (1) The assumption is that in a normal transaction, both sides benefit. (In the language of economists, there is both consumer surplus and producer surplus.)
In this case, the buyer finds the sale advantageous because based on the information he has obtained he thinks the stock is undervalued, and the seller finds it advantageous based on his own knowledge. This situation is unfair only if the buyer's information advantage is itself obtained unfairly. For example, if the buyer is a company insider who has special knowledge of the company's prospects, this information really belongs to the owners, or shareholders, and not to the insiders who have this knowledge only because of their work on behalf of the owners. It's obvious that company managers are not getting paid to obtain information that they then conceal from the owners themselves in order to obtain a bargaining advantage. That's why securities regulations make insider trading a severe transgression.
Another example of an unfair advantage is if the knowledge of the stock's value is widely known but this particular owner is unaware of it. The Torah tells us, "When you sell to your fellow or buy from the hand of your fellow, don't oppress each man his brother" (Leviticus 25:14). From this the Talmud learns that it is forbidden charge a price significantly different than the accepted market price. (2) So if the stock is "undervalued" because you are making a private sale for less than the exchange price, because the exchange price is unknown to the seller, then your information advantage would be considered unfair.
While your question relates specifically to buying an undervalued item, both considerations apply equally to selling an item for more than its value, as the verse states, "When you sell to your fellow or buy". So selling a stock based on inside information that it is about to decline in price or because the buyer is ignorant of the market price is also unethical.
But superior information obtained because of your special knowledge or study belongs to you, and you have the right to benefit from it. We find an example of this in a ruling cited in the Shulchan Arukh (authoritative Code of Jewish Law). A person knows of a special bargain and asks someone else to buy the merchandise on his behalf. If the agent reneges and buys for himself, this is considered unethical dealing. (3) We see that the intended buyer is ethically entitled to benefit from his special knowledge, vis a vis the agent and the seller alike.
SOURCES: (1) Mishnah Nedarim 4:6 (2) Babylonian Talmud Bava Metzia 47b. (3) Shulchan Arukh Choshen Mishpat 183:4 in Rema glosses.
This topic is discussed in detail in chapter 4 of Rabbi Aaron Levine's book Case Studies in Jewish Business Ethics.
The Jewish Ethicist presents some general principles of Jewish law. For specific questions and direct application, please consult a qualified Rabbi.