What Is Insider Trading?

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Simply put, insider trading, in most cases, is conduct that is considered illegal and against the law. However, when owners or employees in any corporation that has publicly traded stock buy or sell shares of their own corporation, it is legal, as long as such action is registered with and documented with the Securities and Exchange Commission (SEC).

Insider trading is an action that is prohibited if such trading is undertaken after receiving information from people who have fiduciary or similar responsibilities in the concerned company (i.e., information that is not generally available to the public).

It becomes an illegal offense when information that is not public is taken advantage of in order to exchange, buy, or sell shares in any company. This insider knowledge is not available to others and gives an unfair advantage to people with that knowledge, thus making it illegal. This violates the need for transparency that is important for the firm foundation of any securities market.

When insider trading becomes illegal, the fraud can be reported to the SEC with help from a whistleblower lawyer.

The stock market depends on information that is transparent and available to all players in the market simultaneously so that no particular person has a distinct advantage. Any advantage that any one person has will depend on skills and the correct analysis of incidents, events, and trends that can help them improve their financial position or avoid losses.

These skills are acquired after long and sustained study of the markets, and through making correct judgment calls. When such an advantage comes from information that is not available to others, the trader who has such insider information is often able to leverage this into gain from trading in the shares it applies to.     

Insider trading is illegal and comes from buying and selling equity while gaining knowledge about any traded share that is not generally available to the public. Officers and employees of a company can often find about significant developments, whether positive or negative, that can affect the value of its shares or equity.

Taking advantage of this knowledge by trading or giving the information to others can lead to illegal insider trading by people who have positions of trust. It is this breach of trust that makes the action illegal and liable to prosecution by authorities after such action is discovered or proven. Any person who has such knowledge and used it to trade or caused others to trade will have broken the laws and could be liable for prosecution.

Insider trading can destabilize the market and affect its fairness and integrity. Investors need to be very careful when they receive such tips and be aware of becoming exposed to legal action against them. When the employees in a company legally trade in their own stock after informing the authorities, this can often indicate the health of the company and its potential for investment. When they are buying their own stock, it often means that the company is in a position of growth and expansion that can bring further financial benefits to its stockholders.