Important Facts about Insider Trading

Insider trading can be a very serious offense, and many people think of Martha Stewart now when they think of insider trading, because this offense can lead to sanctions up to and including incarceration. But what exactly is insider trading? This practice occurs when stocks are bought and sold based on valuable information that is unavailable to the general public. Insider trading is against the law in the United States and many other countries, and in America the practice is forbidden by the Securities and Exchange Commission, or SEC. The SEC is responsible for the oversight of the stock market to ensure that it stays orderly and fair, and it is a government agency. Unfortunately, the practice is becoming more common over time, and the practice can be hard to prove. In the past, the intent of the trader was a component to the crime, and to be convicted of insider trading it was necessary to show that the person had an intent to misuse the inside knowledge to benefit themselves. That is no longer the case, however, and to be found guilty today of the crime all that is needed is to show that non-public information was used as a base for the decision to invest in the stock, whether th intent was to misuse the knowledge or not.

Insider trading commonly occurs because someone receives inside information, like an upcoming merger that has not been made public yet or a new product that will be released soon but is still secret. If stock is purchased right before a big announcement is made concerning a merger, new product, or other development that could cause the stock price to increase because of inside information, this can make a fast profit for the trader at the expense of an unfair advantage. Insider trading is illegal because it harms the market by reducing the confidence of the investors in the market. Traders who do not have access to the same information are at an unfair disadvantage when it comes to the market and trading decisions, and may believe the chance of profitable trades are less. Without investors, business expansion can not be financed, and an economy that is healthy relies on this. It is important that the market is fair to all traders and investors, so that investors trust the market enough to invest in it and finance business expansion.

There are three main classifications of insiders when it comes to the market, and these are registered insiders, outside insiders, and temporary insiders. A registered insider is anyone who has a role in the company of the stock being traded, including any officials and employees of the company, as well as the shareholders for the company. This group of insiders usually have access to inside information that the public is not aware of. The SEC has a list of these names to help ensure that insider trading does not occur. Temporary insiders are normally professionals and companies that provide services to the company whose stocks are being traded, like investment bankers, lawyers, accountants, and others. These insiders do not work directly for the company, but their profession gives them access to inside information the public does not know about. An outside insider is someone who receives inside tips from one of the other two types of insiders. This can include acquaintances, friends, family members, and others. All three classes of insiders can face severe penalties for insider trading, including large fines and even jail or prison time, because of the unfair advantages they enjoy as an insider that they could benefit from.

The information supplied in this article is not to be considered as medical advice and is for educational purposes only.