Insider trading

Insider trading

For people to feel confident while participating in the stock market and believing in the value of stocks, fair trading opportunities are required. Due to this, laws and regulations are in place to stop market transactions that don’t take place on an even playing field. 

Insider trading is a prime instance of this. Insider trading is a severe legal issue and violates fiduciary obligations and trust. The sufferers include the economy as a whole and the common investor. 

What is insider trading? 

Insider trading is buying or selling securities of a publicly traded corporation while possessing pertinent information that has not yet become public knowledge. 

The term “insider trading” refers to trading stocks, such as bonds and shares, by certain corporate “insiders” with unique access to information. Simply put, these insiders are aware of things before any relevant information is available to the general public. Insider trading is a behavior that is unlawful when insiders trade in stocks when the general public is unaware of a particular piece of information. The “insider” faces severe repercussions if regulatory authorities learn about such trade. 

Types of insider trading 

The types of insider trading are: 

• Legal insider trading 

When considering insider trading, our minds automatically turn to its bad instances. But there is also such a thing as lawful insider trading. Legal insider trading is described as trading in a company’s listed securities by “insiders” or “connected persons.” Insiders have no special edge over other traders. This type of insider trading is acceptable because “insiders” trade in their own company’s securities using publicly available general information. 

• Illegal insider trading 

When a trader has access to insider information that has not yet been made public and potentially provides them with an advantage over other traders, this is known as illegal insider trading. Illegal insider trading is the practice of trading on material, non-public information, such as news of an acquisition, merger, or the introduction of a new product, that has the potential to affect a company’s stock price significantly. Key personnel or stakeholders in a corporation may easily take advantage of their access to such important information for their gain at all times. 

Consequences of insider trading 

If someone engages in insider trading, he may face jail time, a fine, or both. In U.S., a conviction for insider trading in the US may result in a maximum fine of 5 million USD and up to 20 years in jail, according to the SEC 

The US SEC and the US Department of Justice may conduct separate investigations into a person accused of engaging in insider trading. 

Penalties for insider trading 

Insider trading offenses may be heavily penalized through civil sanctions, criminally prosecuted, or both. If the SEC files a civil case against you for breaking insider trading laws, federal law permits what is known as “treble” damages.  

Accordingly, the maximum fine that can be imposed on you is three times the amount of earnings or losses you prevented. Fraud-related accusations frequently accompany insider trading offenses and may lead to additional prosecution.  

Also, if you are found to have broken US securities laws, you can be subject to additional unintended consequences, including civil penalties or a criminal sentence.

What are examples of insider trading? 

Examples of insider trading in real life: 

• ImClone’s shares plunged after learning that the FDA had rejected its innovative cancer treatment. Even in the wake of such a steep drop in the share price, the CEO Samuel Waskal’s family didn’t seem to care.  

After being informed of the rejection, Martha Stewart sold her holdings when the company’s shares were trading at about 50 USD. In the months that followed, the cost fell below 10 USD. Waskal was forced to resign as the CEO of her company in 2003 after receiving a sentence of more than seven years in prison and a 4.3 million USD fine. 

• Raj Rajaratnam, a millionaire hedge fund manager, made around 60 million USD by exchanging recommendations with other traders, hedge fund managers, and important figures from IBM, Intel Corp., and McKinsey & Co. In 2009, he was convicted of 14 charges of fraud and conspiracy and received a 92.8 million USD punishment. 

Frequently Asked Questions