The Basics of Illegal Insider Trading

Understanding what is insider trading and its consequences

UPDATED: May 2022

The Basics of Illegal Insider Trading – Illegal Insider trading is the purchase or sale of stocks or other securities based on information not available to the general public. It involves a direct breach of fiduciary duty or other violation of trust in which the trader uses insider knowledge to benefit financially.

The Basics of Illegal Insider Trading

Despite many high-profile incidents involving insider trading, many investors are still unsure about what it is, how it works, and why it’s such a big deal. Essentially, insider trading violates key rules and regulations designed to keep the market fair for all investors.

Detailed rules regarding insider trading are complicated and generally vary from country to country. The definition of an “insider” can be significantly different under different jurisdictions. Some may follow a narrow definition and only consider people within the company with direct access to the information as an “insider.” On the other hand, many also consider people related to the company officials as “insiders.”

What Is Insider Trading?

Insider trading happens when someone makes an investment trade based on “material” information not publicly available. In market terms, material information is any detail that could affect a company’s stock price. This information gives the individual an edge that few others have in the market. The trader must typically be someone who has a fiduciary duty to another person, institution, corporation, partnership, firm, or entity.

You can get into trouble if you make an investment decision based upon information related to that fiduciary duty if that information isn’t available to everyone else.

How Insider Information Works?

Insider trading can also arise when no fiduciary duty is present, but another crime has been committed, such as corporate espionage. For example, an organized crime ring that infiltrated certain financial or legal institutions to systematically gain access to and exploit and use private information might be found guilty of such trading, among other charges for the related crimes.

Insider information allows a person to profit in some cases and to avoid loss in others. In either case, it’s an abuse of someone’s knowledge or position of power. It’s illegal because it gives an unfair advantage to people who are “in the know.” Those who have been prosecuted for insider trading include corporate officers, employees, government officials, and those who have tipped them off with insider information.

However, not all insider trading is illegal. Many factors must be considered before the Securities and Exchange Commission (SEC) will prosecute someone for insider trading. The main issues the SEC must generally prove are that the defendant had a fiduciary duty to the company and/or they intended to personally gain from buying or selling shares based upon insider information.

What Are the Penalties for Insider Trading?

Insider trading penalties generally consist of a monetary penalty and jail time, depending on the severity of the case. The SEC has moved to ban trading violators from serving as executives at publicly traded companies.

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About the Author & How YOU Can Profit:  This article is the copyrighted product of the team at BuybackAnalytics.com .

Buyback Analytics is a Top Tier Investing Platform to help investors find, analyze, and profit from investing opportunities not found through traditional investment tools. We specialize in this simple concept:  Follow the trades of Insiders – CONSISTENTLY PROFITABLE Traders, Investors, and Institutions because THEY get Inside Information that YOU don’t:

LEGAL Insider Trading / Inside Traders (CEOs, CFOs, Corporation’s Accountants & Attorneys, Politicians, etc.)
Stock Buybacks (Share Repurchases) by Public Corporations (ie. Apple, Tesla, Netflix, Meta (Facebook), Microsoft, etc.)
Market Moving Institutions (Examples: Market Makers, Investment Banks, Stock Brokerages, Hedge Funds, etc.)

Use of Our Articles: You are welcome to benefit from lots of FREE articles that you can read and learn from on our website blog.  You are also welcome to share or post this information as helpful content to your website or blog audience as long as the article, and this entire byline are left intact, word for word.  If you would like us to provide you with more, or bulk content for your blog or website to educate your audience on basic to expert financial and investor information & techniques, feel free to contact us at info@buybackanalytics.com .

Legal Insider Trading: What Is It, and How It Affects Investors?

Understanding legal insider trading and its impact on investors

UPDATED: April 2022

Legal Insider Trading: What Is It, and How It Affects Investors? – Most people assume that insider trading is always illegal. The term has been associated with scandals and names such as Enron, celebrity businesswoman Martha Stewart, and former Goldman Sachs director Rajat Gupta.

Legal Insider Trading: What Is It, and How It Affects Investors?

If you type “insider trading” in Google’s search box, the first hit is a definition from Google: “the illegal practice of trading on the stock exchange to one’s own advantage through having access to confidential information.” This is inaccurate at best because the term “insider trading” includes both legal and illegal conduct.

Illegal insider trading is considered an act of security fraud. The Securities Exchange Act of 1934 makes it clear that any person who purchases or sells a security while in possession of “material, non-public information” shall be held liable. This term applies to “corporate insiders,” such as managers, directors, or employees, as well as de-facto insiders who obtain material, private information from various sources. You could overhear some important news when dining at a restaurant, but trading on such information could potentially constitute illegal insider trading.

You can’t even ask your friends to profit from the information because “tipping” the information violates the law as well. Information is material if there is a substantial likelihood that it will affect a company’s stock price once released. In practice, it is usually difficult to prove how “material” information is. As such, illegal insider trading is very difficult to detect and prosecute.

The legal conduct of insider trading refers to trading by “corporate insiders.” A long list of people falls into this category, including directors, managers, employees, beneficial owners, and people affiliated with the firm in other significant ways. These people are allowed to trade securities of their firms, provided they do not possess material, non-public information.

Trades by corporate insiders must be filed with the U.S. Securities and Exchange Commission within two business days. Although these trades are not supposed to contain material information, many people believe that these trades reflect information that is not material enough to be released otherwise. Academic studies also find that insider trades can predict future stock returns and earnings.

Consistent with what people would expect, insider purchases seem to move stock prices more than insider sales do, and trades by managers and directors seem to move stock prices more than other traders do. Following insider trades, especially the large purchases by directors and managers, can be a lucrative trading strategy for sophisticated investors.

Should All Forms of Insider Trading Be Prohibited?

While many people might feel insider trading is not “fair” to outside investors, economists have long attempted to answer the question from the perspective of shareholder wealth and cost of capital. Empirical evidence so far suggests that illegal insider trading may have adverse effects on the general information environment and can thus increase a firm’s cost of capital and decrease a firm’s market value.

However, some researchers argue that legal insider trading could benefit shareholders by making stock prices more informative, which further lowers the cost of capital and increases firm value.

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About the Author & How YOU Can Profit:  This article is the copyrighted product of the team at BuybackAnalytics.com .

Buyback Analytics is a Top Tier Investing Platform to help investors find, analyze, and profit from investing opportunities not found through traditional investment tools. We specialize in this simple concept:  Follow the trades of Insiders – CONSISTENTLY PROFITABLE Traders, Investors, and Institutions because THEY get Inside Information that YOU don’t:

LEGAL Insider Trading / Inside Traders (CEOs, CFOs, Corporation’s Accountants & Attorneys, Politicians, etc.)
Stock Buybacks (Share Repurchases) by Public Corporations (ie. Apple, Tesla, Netflix, Meta (Facebook), Microsoft, etc.)
Market Moving Institutions (Examples: Market Makers, Investment Banks, Stock Brokerages, Hedge Funds, etc.)

Use of Our Articles: You are welcome to benefit from lots of FREE articles that you can read and learn from on our website blog.  You are also welcome to share or post this information as helpful content to your website or blog audience as long as the article, and this entire byline are left intact, word for word.  If you would like us to provide you with more, or bulk content for your blog or website to educate your audience on basic to expert financial and investor information & techniques, feel free to contact us at info@buybackanalytics.com .

3 Ways to Prevent Illegal Insider Trading in Your Company

Learn how to prevent insider trading in your company

UPDATED: April 2022

3 Ways to Prevent Illegal Insider Trading in Your Company – Insider trading has been a buzzword for the last two decades. The greatest risk corporations face with respect to insider trading is not greed or malicious intent but negligence, and this is not much discussed. Most instances of insider trading are preventable, at least on a corporate level.

3 Ways to Prevent Illegal Insider Trading in Your Company

Some checks and balances can be installed to insulate the corporation from allegations of wrongdoing in cases of insider trading, the non-negative returns on which can be substantial. Although corporate criminal fines for insider trading are capped at $25 million, the penalties for other charges associated with insider trading activities can far exceed this number. With that in mind, we will share the 3 best practices for preventing illegal insider trading in your company.

Restrict Risky Trading – How to Stop Illegal Insider Trading

A popular strategy to reduce the risk of violating insider trading rules is to restrict employee trading on company-owned securities at specific times, such as the weeks around when earnings reports come out. Earnings reports will detail the projections for company-owned securities, and as such, while they are compiled, there may be an opportunity for those looking for privileged material information to find it and trade based on it.

This approach removes the ability to trade on any insider information at all, thus insulating the corporation by circumventing any intent to do so. A more extreme version of this tactic is maintaining a list of securities in which employees may not trade at any time.

Ensure Your Employees Are Educated On Legal Insider Trading

Legal Insider trading is easier to commit than most would like to admit. Having a robust training program that not only acknowledges this but drives home just how serious the penalties for illegal insider trading are for both insiders and the companies they work for is integral. This should cover all possible instances of insider trading.

These can range from a speculative conversation on the future of a security with a family member or friend to purposefully shirking blackout periods to trade on covered securities. Hence, all insider trading can’t be prevented by the firm in which it happens. Still, the firm will be in the best possible position with these measures in place.

Appoint an In-House Watchdog – How to Prevent Insider Trading

It is so important that your company executives and legal counsel know How to Prevent Insider Trading. Instead of simply relying on your employees to submit clearance requests for trades of covered securities, one way to ensure compliance, for posterity’s sake, is to mandate employee submission of statements from the brokerages that they personally use, combined with attestations from each employee that their submissions of trades are accurate.

This can be a powerful deterrent against insider trading on the securities owned by your company. Not only are companies that implement checks on their insiders’ trades going to have more success in discouraging insider trading, but with a reputation for not looking the other way, they are less likely to be investigated by regulators.

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About the Author & How YOU Can Profit:  This article is the copyrighted product of the team at BuybackAnalytics.com .

Buyback Analytics is a Top Tier Investing Platform to help investors find, analyze, and profit from investing opportunities not found through traditional investment tools. We specialize in this simple concept:  Follow the trades of Insiders – CONSISTENTLY PROFITABLE Traders, Investors, and Institutions because THEY get Inside Information that YOU don’t:

LEGAL Insider Trading / Inside Traders (CEOs, CFOs, Corporation’s Accountants & Attorneys, Politicians, etc.)
Stock Buybacks (Share Repurchases) by Public Corporations (ie. Apple, Tesla, Netflix, Meta (Facebook), Microsoft, etc.)
Market Moving Institutions (Examples: Market Makers, Investment Banks, Stock Brokerages, Hedge Funds, etc.)

Use of Our Articles: You are welcome to benefit from lots of FREE articles that you can read and learn from on our website blog.  You are also welcome to share or post this information as helpful content to your website or blog audience as long as the article, and this entire byline are left intact, word for word.  If you would like us to provide you with more, or bulk content for your blog or website to educate your audience on basic to expert financial and investor information & techniques, feel free to contact us at info@buybackanalytics.com .