Insider Trading – Wiki Payments

What Is Insider Trading?

Insider trading involves trading in a public company’s stock by someone who has non-public, material information about that stock for any reason. Insider trading can be either illegal or legal depending on when the insider makes the trade. Insider trading is illegal when the material information is still non-public, and this sort of insider trading comes with harsh consequences.

Understanding Insider Trading

The U.S. Securities and Exchange Commission (SEC) defines illegal insider trading as: “The buying or selling of a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security.”

Material information is any information that could substantially impact an investor’s decision to buy or sell the security. Non-public information is information that is not legally available to the public. The question of legality stems from the SEC’s attempt to maintain a fair marketplace. An individual who has access to insider information would have an unfair edge over other investors, who do not have the same access, and could potentially make larger, unfair profits than their fellow investors.

Illegal insider trading includes tipping others when you have any sort of material nonpublic information. Legal insider trading happens when directors of the company purchase or sell shares, but they disclose their transactions legally. The Securities and Exchange Commission has rules to protect investments from the effects of insider trading. It does not matter how the material nonpublic information was received or if the person is employed by the company. For example, suppose someone learns about nonpublic material information from a family member and shares it with a friend. If the friend uses this insider information to profit in the stock market, then all three of the people involved could be prosecuted.

When Is Insider Trading Illegal?

Insider trading is deemed to be illegal when the material information is still non-public and this comes with harsh consequences, including both potential fines and jail time. Material nonpublic information is defined as any information that could substantially impact the stock price of that company. Obviously, being privy to such information could influence an investor’s decision to buy or sell the security which would give them an edge over the public who do not have such access. Martha Stewart’s 2001 ImClone trading is a prime example of this.

When Is Insider Trading Legal?

Legal insider trading happens in the stock market on a weekly basis. The question of legality stems from the SEC’s attempt to maintain a fair marketplace. Basically, it is legal when company insiders engage in trading company stock as long as they report these trades to the SEC in a timely manner. The Securities Exchange Act of 1934 was the first step to the legal disclosure of transactions of company stock. For example, directors and major owners of stock must disclose their stakes, transactions, and change of ownership.