What is Insider Trading?

Posted by on Jul 25, 2013 in Commodities and Securities, Insider Trading | 0 comments

It is common knowledge that both Martha Stewart and Enron were busted for insider trading. However, many people are unaware of what insider trading actually is, and that there are legal and illegal forms of it. The SEC serves to regulate stock trading within the U.S. and go after those who chose to engage in illegal insider trading. When regulations aren’t followed, it corrupts the market that relies on the fairness of competition and participation in order to run properly.

When an employee buys or sells stock from the company they work for, that is considered legal insider trading. The line between legal and illegal trading is crossed when a person can impact a company’s stock price, and then makes a trade based on that knowledge. For example, an employee who finds out that their company will have higher annual revenue than expected and then buys shares in their company based on that information, has just committed a form of illegal insider trading. If that employee shares their information with friends or family who then buy company shares, then the friends and family are considered to be engaging in illegal insider trading as well.

A person violates the law when they breach their duty to keep certain information confidential. The employee who gave information to his friends and family breached this duty. Even though these people are outsiders, they are liable for securities fraud because they are using inside information to their own advantage. This liability is called the misappropriation theory, and applies to people who receive material information that isn’t public.

Using inside information is illegal because that knowledge is not available to everyone trading, and therefore, gives the person with that knowledge an inside advantage. The United States has some of the strictest laws against illegal insider trading, and the SEC goes to great lengths in order to enforce them.

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