Understanding Insider Trading: Legal and Illegal Practices

Understanding Insider Trading: Legal and Illegal Practices

Have you ever wondered about the different types of insider trading and what it entails? Let's explore this topic and shed some light on insider trading. In general, insider trading refers to the act of trading stocks based on non-public information by individuals such as company executives or employees. While employees buying or selling stocks from their own company is legal, the Securities and Exchange Commission (SEC) closely monitors these transactions to prevent illegal insider trading.

When a high-level manager or CEO intends to sell their company's stock, they are required to notify the SEC. This is because, in most cases, if a CEO is selling their shares, it suggests they possess information that might negatively impact the company. The rationale behind this requirement is to prevent them from profiting or avoiding losses solely due to non-public information.

We often hear about illegal insider trading cases that result in individuals going to prison, but it's important to note that there are legal forms of insider trading as well. If an employee who holds less than ten percent ownership in the company wishes to buy or sell their company's securities, it is perfectly legal. Similarly, someone who owns more than ten percent of the company can trade their company's securities, provided they notify the SEC. However, they cannot make trades based on significant non-public information they obtained through their employment.

Lower-level employees typically need not worry about insider trading, even if they trade their employer's securities, as they are not privy to highly sensitive information in the course of their work.

It's crucial to understand that claiming ignorance about the illegality of insider trading is not a viable defense. It is expected that individuals in possession of non-public information recognize that using such information for financial gain is illegal.

The SEC has a full disclosure rule, which mandates that if a corporation accidentally discloses non-public information, they must provide the same information to the general public. The SEC also has procedures in place to address deliberate or accidental leaks of insider information and mitigate any potential damage caused.

Contrary to what you might hear on the news, insider trading encompasses various types, and not all of them are illegal. Engaging in insider trading to profit from securities transactions or to avoid losses when aware of forthcoming troubles within a company is considered a crime.

Before delving into stock trading, it's crucial to take the time to fully understand the intricacies involved. After all, it's your hard-earned money at stake, and being well-informed is essential to making sound financial decisions.

Photo Credit: Snapwire

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