DEFINITION of 'Guilt-Edged Investment'
An unethical investment that generates profits for the investor. A guilt-edged investment is a colloquial term for an investment or transaction that should inherently produce feelings of guilt or remorse in the investor who engaged in unethical or illegal investment activities. Not all who engage in guilt-edged investment activities, however, feel any remorse in doing so. Typically, a guilt-edged investment involves a transaction in which one person takes advantage of another, thereby profiting through the unscrupulous investment activity. The term is a play on words for gilt-edged securities (high-grade bonds issued by governments or firms).
BREAKING DOWN 'Guilt-Edged Investment'
Guilt-edged investments are not necessarily illegal in nature, but are considered unethical. With these types of investments, the offender may rely on taking advantage of a person who is either unaware or does not fully understand the implications of the transaction. Certain real estate transactions, for instance, may be categorized as guilt-edged investments. For example, a person may purchase a fixer-upper with the intention of making the necessary renovations/remodel and selling it for a quick profit (a practice known as "flipping"). If the seller knows about something important that will affect the future value of the home (for example, that the road will soon be widened and some of the property will be lost to eminent domain) but does not disclose the information to the buyer, the lack of disclosure is not necessarily illegal but may be considered unethical.
In this example, the seller is able to make more of a profit from his or her real estate investment because he or she was able to take advantage of an unsuspecting homebuyer. Many states have laws that specify which disclosures must be made to potential buyers. Certain things have to be disclosed only if a potential buyer specifically asks about the item in question.
Another example of guilt-edged investments involves Internet chat rooms that have moderators acting as trading coaches and who post their trade entries and exits. In some cases, it has been argued that some moderators are in essence "front-running" the trades, or trying to get more investors involved in a particular trade to help push the trade in a favorable direction, thereby allowing the moderator to make a profit.