The Ins and Outs of Insider Trading

The Ins and Outs of Insider Trading
March 18 07:45 2017 Print This Article

You see it all the time on the nightly news, on your Facebook feed, and around town. Insider trading is a very real thing, and there are millions of victims across the country at any given time. Insider trading is illegal, but that doesn’t stop it from happening. Whether a friend of yours fell victim to this or you suspect your stock broker of this practice (which is why you should always know a good securities fraud attorney), it’s important to know what insider trading is and how to spot it.

Basics of Insider Trading

This practice is when an investor makes a profit off non-public information at the financial expense of others. The FBI and Securities and Exchange Commission are involved in countless cases at any one time, trying to catch the perpetrators behind the scams. Insider trading is so common because it’s easy AND it’s hard to prove. Sometimes high-profile people are accused (take Martha Stewart for example), which makes it even more difficult to get a fair trial.

Some individuals use confidential or advanced information that the rest of the market is not aware of because it’s not publicly available. Their purpose is to avoid a big loss or make a big profit. Greed…it’s nothing new. But it IS the main reason why so many people get into these crimes. Certain people have better access to inside information than others. Take company officers, directors or employees: they can buy stock in their company, but if they use their position of power or convenience to base decisions on buying or selling that stock if said information hasn’t been released to the public yet, they are breaking the law. All of that information has to be publicly dispensed, which means they must report their purchases or sales to the SEC.

The Seriousness of Insider Trading

Rogue investors may think: what’s the big deal? The money is out there, it’s a victimless crime, no one’s getting hurt. However, insider trading threatens the foundation of our financial markets, as without trust that the system will work honestly and fairly, the whole institution fails to have any credibility whatsoever. Government regulators take these allegations very seriously and are constantly investigating cases so they can bring perpetrators to justice.

Solutions

Instead of using non-disclosed information, there are ways to legally make such information known. Publicly-traded companies have to disclose parts of their business operations so people have a fair chance to invest or choose not to. From profits to earnings, these reports can be released to show people the true goings-on of a company. Sometimes, the board of directors and who has been recently appointed can tell investors all they need to know. If a company chooses to make this kind of information public, they file a form with the SEC.

There are certain individuals who are more likely than others to use inside information to make illegal trades, such as:

  • Corporate officers, directors, and employees
  • Friends, business associates, and family members of the above
  • Government employees
  • Employees of law, banking, brokerage and printing firms

The more you learn about insider trading, the more protected you’ll be. Head to the SEC website to learn more about what is being done about insider trading.

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