Insider trading, I like to say, is not about fairness: It’s about theft. In the US, most of the time, it is illegal to trade on inside information about a company not because that’s unfair to everyone else who doesn’t have the information, but because you have some duty to somebody else not to misuse their information. So if you work for a public company, you have a duty to the shareholders not to trade on inside information before disclosing it to them. Or if you are the spouse or golf buddy or therapist of an executive at a public company, and she tells you about an upcoming deal, you have a “duty of trust or confidence” to her not to go trade on it, and if you do that’s a crime.
But if you don’t have a duty to keep the information confidential, probably you can go ahead and trade on it. (Nothing here is legal advice!) Some important, though somewhat hazy and controversial, examples:
FAQs
Insider trading, as opposed to other forms of informed trading, can harm the integrity of the markets and lead to serious legal implications for the individuals involved. It also victimizes everyday investors who don't have access to the same information as the insiders.
Does insider trading hurt the economy? ›
Insider trading creates a culture of corruption that hurts the market's liquidity and efficiency. "The worry is that if this happens often, people won't be as willing to buy stocks, and they'd be less trusting of the market in general,'' says Robert C. Hockett, a lawyer and law professor at Cornell University.
Why is insider trading considered an unethical practice? ›
The main argument against insider trading is that it is unfair and discourages ordinary people from participating in markets, making it more difficult for companies to raise capital. Insider trading based on material nonpublic information is illegal.
What are the consequences of insider trading? ›
Insider trading is deemed illegal when the material information is still non-public and comes with harsh consequences, including potential fines and jail time. Material non-public information is defined as any information that could substantially impact that company's stock price.
How often is insider trading caught? ›
Insider trading happens when a person or company uses information that is not available to the public to make a profit or avoid losses in financial markets. The US Securities and Exchange Commission prosecutes approximately 50 insider trading cases per year, and there are harsh penalties of up to 20 years in prison.
How do people get caught for insider trading? ›
The Securities and Exchange Commission plays a pivotal role in detecting and prosecuting insider trading. The agency monitors trading activities and investigates unusual spikes in trading volume or price changes that precede significant corporate events, such as mergers or earnings reports.
What level of crime is insider trading? ›
Like other white-collar crimes, insider trading (securities fraud) is prosecuted as a felony when the federal government decides to pursue such allegations. In fact, you face up to 25 years in federal prison along with a fine of up to $5 million per offense if you are convicted of securities fraud.
Should I be worried about insider trading? ›
Insider trading has been an unethical and illegal activity which has hampered the stock markets of a country enough. This practice has all been about gaining benefits through the non-public confidential information.
Who suffers from insider trading? ›
Friends, family, or business associates tipped off to such information from company employees of any level. Employees of brokerage, banking, law, or printing firms who traded based on information they obtained through providing services to the company using their firm to trade securities.
How do companies avoid insider trading? ›
There are a number of ways you can prevent insider trading at your company. Insider lists are an obligation but also a reminder to insiders of their responsibilities. Monitoring trades, training staff accordingly and making use of automated solutions can complement your insider trading policies and ensure compliance.
Examples of Market Manipulation
There are many ways that market manipulation can be carried out, but some common tactics include spreading false or misleading information about a company or its products, creating fake demand for a security by placing large orders that are never executed, or engaging in insider trading.
What are the disadvantages of insider trading? ›
Engaging in insider trading is illegal and considered a serious financial crime. It breaches trust and fiduciary duties. Regulatory authorities like the SEC or SEBI impose strict penalties, including heavy fines and imprisonment, to deter such practices. Insider trading erodes the integrity of financial markets.
What agency investigates insider trading? ›
Over the years, the SEC has brought insider-trading cases against hundreds of parties, including: Corporate insiders who traded the company's securities after learning of significant, confidential developments.
Does insider trading beat the market? ›
Stock prices rise more after insiders' net purchases than after net sales. On the whole, insiders do earn profits from their legal trading activities, and their returns are greater than those of the overall market.
What is the civil penalty for insider trading? ›
In the US, corporations and entities may face fines up to $1,000,000 or three times the profit gained or the loss avoided as a result of the violation, if the company knew or recklessly disregarded the fact that the controlled person was likely to engage in the acts constituting the insider trading violation and failed ...
Is insider selling always bad? ›
No, not necessarily. You'd be forgiven for assuming that insiders who sell stock expect the company's share price to decline, but there are lots of other, less ominous, reasons for insider selling.
Why stop insider trading? ›
Essentially, if a person or someone they know benefits from non-public information that the person has access to, they will have an unfair advantage over the rest of the market. This also causes an imbalance and skews the market, adding to volatility.
Why is it bad to have too much insider ownership? ›
But you can have too much insider ownership. When insiders gain corporate control, management may not feel responsible to shareholders and instead, to themselves. This frequently occurs at companies with multiple classes of stock, which means one class carries more voting power than another.
