The dangers of insider trading

An insider is one who has information about a company and makes an exchange based on privileged information. This undermines people’s faith in the market and hurts investors who don’t have access to the same information.

The information is the value of the shares and it is illegal to trade if you have non-public information that affects the price or value of the shares. Insider trading penalizes the general business public who speculate on trends in company information without actual knowledge. For example, if you, as a company official, knew that a new product would revolutionize the industry and drive up your company’s stock prices, and you bought as many shares as you could before the public offering, you would be guilty of insider trading. trade.

Illegal actions come into play by buying or selling a security while in possession of non-public information or material about the stock or security. This includes trading by those who have a relationship of trust. The SEC has prosecuted insider trading cases against corporate officers, employees and directors who traded company securities after becoming aware of significant events. Friends and business associates of these officers and directors have been sued for information provided by people in a position of trust. If you are an employee of a legal, banking or brokerage firm who was provided with company information and you traded on that information, you have just broken the law.

Insider trading undermines investors’ confidence in the integrity and fairness of the securities markets. SEC agents consider the discovery and prosecution of insider trading abuses to be part of their high enforcement priorities. Investors should be acutely aware of the dangers of trading on the advice of employees or officials who know private information about a company. If you are considering insider trading, be aware that this act carries severe civil and criminal penalties. Prison time is an option and fines that could bankrupt you can be taken advantage of.

Insider trading can also be legal. It is legal when corporate officers, directors, shareholders or employees buy and sell shares within their own companies. They report their operations to the SEC and this information is used to identify companies with high investment potential. The premise: If insiders are buying shares in their own company, they need to know that your company is growing upwards.

You can trade with confidence using inside information or advice if you can provide proof that the information you received did not influence your decision to trade and that your trade was made in good faith. However, keep in mind that the burden of proof is on your shoulders and it could be very difficult to verify. Keep good records of every conversation you have with brokers. Document the advice and where it came from and when you received it.

If you are contacted by a regulatory official regarding your trading, retain a securities attorney before speaking with regulators. Gather all your records and be prepared to justify your insider trading.