What exactly is insider trading and why it is illegal?

Published By Ayesha Jaiswal, 21 Sep 2017

What exactly is insider trading and why it is illegal?

Insider trading means a person buys or sells a stock which is based on the information that is totally confidential. The person may be a corporate officer or a director employee or someone who has right to receive the information which is not available to the public. Generally, it is illegal but it can be legal if the trading is done on the basis of information which is available to the public.

Insider trading is considered as a malpractice where trading of a company's stocks and securities is done by a person who because of their position has access to various valuable non-public information which can be important for making investment decisions. For better understanding traders can take help of financial specialist with their stock tips and trading recommendations which will help them to focus on right direction.

Insider trading is an intolerant practice, where the other stockholders face disadvantage due to lack of some non-public information which can be useful in their trading decision. Although, in some cases, if the information is available to the public, in a way that all the investors associated with trading can use it, that will not be considered as an illegal insider trading.

Generally, insider trading considered either legal or illegal based on action of a person -

1. Legal Insider Trading

It is legal for insiders to buy and sell a stock in their company. There are thousands of insider trading every day. As long as the insider trading is based on information that is available to the public then no laws are broken.

However, insider trading is known as an act of illegal trading but the security and exchange commission defines that it can also be legal also under some circumstances. It is considered as lawful in following cases -

1. An employee of a corporation exercises his stock options and buys 200 shares of stock in the company that he works for.

2. One of a board member of a corporation purchases 1,000 shares of stock option in the corporation. The trade is reported to the Securities and Exchange Commission.

2. Illegal Insider Trading

It is a type of trading based on the secret information, it is an act of "Hiding" some information from the public. A person who involves in illegal insider trading may work for the company that he purchases the security for, but it's not necessary same in all case. The main point is that the person who purchases or sells the stock which is based on confidential information in against law.

1. A government employee already knows that a new rule by the government is going to be passed that will prove beneficial for a particular company, then the government employee secretly purchases stock of that company and then forces the regulation to take action as soon as possible.

2. One of a corporate officer came to know of a secret merger between his company and another business. Knowing that the amalgamation will need the buying of shares at higher prices, the corporate officer purchase shares on the day before the merger is going to initiate.