What Is Insider Trading?When most people hear the term insider trading they think of the illegal version. However, the term insider trading can also mean the perfectly legal buying and selling of stock by a companys corporate insiders. Insider trading is legal when these corporate insiders trade stock of their own company and report these trades to the U.S. Securities and Exchange Commission (SEC). That way the insider trading is not kept a secret and anyone can find out a corporate insiders opinion of his or her company.
Insider trading is only illegal when a person bases their trade of stocks in a public company on information that the public does not know. It is illegal to trade your own stock in a company based on this information but it is also illegal to give someone that information, a tip, so they can trade their stock.
Why Is Insider Trading Illegal?The SECs job is to make sure that all investors are making decisions based on the same information. Insider trading can be illegal because it destroys this level playing field.
Punishments and Rewards Associated With Insider TradingAccording to the SEC website there are almost 500 civil enforcement actions each year against individuals and companies that break securities laws. Insider trading is one of the most common laws broken. The punishment for illegal insider trading depends on the situation. The person can be fined, banned from sitting on the executive or board of directors of a public company and even jailed.
The Securities Exchange Act of 1934 in the United States allows the Securities and Exchange Commission to give a person a reward a bounty to someone who gives the Commission information that results in a fine of insider trading.
If you'd like to ask a question or comment on this story, please use the feedback form.