What is Insider Trading?

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You’ve likely heard about it on the news. Maybe a friend of your was a victim, or maybe you suspect your stock broker of this practice (incidentally, always know a good securities fraud attorney for this purpose). Wall Street is notorious for insider trading, and those cases make the news fairly regularly. So what is it?

This is when an investor makes a profit off non-public information at the financial expense of others. It can be difficult to prove, however; therein lies the rub. High-profile people, from Michael Milken to Martha Stewart, have made headlines over the years. There are any number of federal investigations going on at any given time, with both the FBI and Securities and Exchange Commission involved to catch less-than-reputable individuals.

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Basically, investors can be held legally responsible on charges if they are found to have used confidential or advanced information that the rest of the market is not privy to because it has not been made publicly available. The intent of these transactions is to avoid loss or make a big profit. It’s a tale as old as time, really: greed is at the heart of these cases. Those with inside information, like company officers, directors or employees, are allowed to buy or sell stock in their company; however, important information regarding the stock or company has to have been publicly dispensed. This means they have to report their purchases or sales to the SEC.

Why is this such a big deal? Well, insider trading threatens the very foundation of our financial markets. Without trust that the system will work as it should – honestly and fairly – the whole institution has no credibility. That’s why government regulators take these allegations so seriously.

There are ways to make information public – legally. All publicly-traded companies in this country must by law disclose certain pieces of its business dealings in order to give people a fair chance to invest or not. This info can come in the form of profits and earnings, or it could involve who has been appointed to the board of directors. When a company wants to make those pieces of information public, they file forms with the SEC.

As said before, these cases are difficult to try. Often, individuals – especially high-profile celebs – get off with merely a slap on the wrist or some fines. It’s very rare to convict someone on criminal charges but it can and does happen. According to the SEC, those with inside information that could use that information for personal gain include:

  • Corporate officers, directors, and employees
  • Friends, business associates, and family members of those officers, directors, and employees
  • Employees of law, banking, brokerage and printing firms
  • Government employees

For more information on insider trading, check out this article.

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