As the name suggests, insider trading involves trading in a public company’s stock or other securities by someone who has nonpublic material information about the company in question.
Insider trading is legal if the insider reports the transaction to the Securities and Exchange Commission (SEC). However, insider transactions is illegal if the material information used for trading was nonpublic at the time of the transaction. Differentiating between legal and illegal insider transactions is crucial when the insider wants to avoid potential criminal consequences associated with the trade.
Legal vs. illegal insider trading
Insider trading is legal when company insiders, such as executives and employees, buy or sell shares of their company’s stock and report these transactions to the Securities and Exchange Commission (SEC). When company insiders make their trades based on information is not public facing, however, such transactions are illegal. The unethical practice of trading a public company’s stock or securities based on non-public information undermines market integrity and fairness.
Types of unlawful insider trading
Examples of illegal insider training include:
- Corporate insiders, including executives and employees, buying or selling company stock based on privileged information. This information could range from financial results to upcoming mergers or acquisitions.
- Tipper or tippee trading that involves a chain of individuals, where the “tipper” provides confidential information to a “tippee” who then trades on the information. Both parties can face legal consequences.
- Trading based on rumors or speculative information when the information hasn’t been officially disclosed. This form of insider trading is difficult to regulate but can result in significant market impacts.
Understanding insider trading is important for anyone involved in financial markets. As an investor or market participant, staying informed about legal and ethical practices is essential for avoiding the severe penalties associated with illegal insider transactions. Knowledgeable and competent legal representation is essential if you are facing insider trading charges.
