UPDATED: April 2022
Advantages and Disadvantages of Insider Trading – A debate rages on in the financial community among professionals and academics about whether insider trading is good or bad for markets.
Table of Contents
Advantages and Disadvantages of Insider Trading
Insider trading refers to the purchase or sale of securities by someone with information that is material and not public in the realm. Insider trading is not limited to company management, directors, and employees. Outside investors, brokers, and fund managers can also violate insider trading laws if they access non-public information.
Advantages of Insider Trading
The advantages of insider trading, defined as buying and selling stocks based on information originating within the relevant organization or business that is not publicly available, are clear. Those engaged in insider trading are partaking in a low-risk, high-reward practice that can reap considerable financial rewards. Insider trading is commonly assumed to be entirely illegal, but there’s a legal means of trading in stocks with inside information.
Employees and corporate officers are legally entitled to trade in the stocks of their own company. As long as those transactions are properly reported to the U.S. Securities and Exchange Commission (SEC), the transactions are perfectly legal and highly profitable.
Insider Trading Is Illegal?
Insider trading is illegal and has landed many investors in legal trouble, including spending years in prison, when it involves individuals outside of the corporation in question who buy or sell stock in that corporation based on information provided from individuals inside the corporation, who are privy to sensitive, proprietary information not accessible to the general public.
Illegal insider trading includes buying and selling stocks, the change in value that can be inferred logically from information an individual possesses about a particular corporation based on their association with that corporation. An example could include employees or officers of financial services companies doing business with the corporation whose stock they are trading.
Disadvantages of Insider Trading
In the case of illegal insider trading, the disadvantages are clear: prosecution by the U.S. Department of Justice and civil suits filed on behalf of shareholders by private and government agencies. Violations of laws restricting insider trading carry significant financial penalties and can, as noted, involve prison sentences. Among prominent individuals convicted of insider trading are:
- R. Foster Winans, a former reporter for the Wall Street Journal. He was convicted of providing information attained in the performance of his duties as a reporter for the financial benefit of friends.
- Ivan Boesky, one of the faces of the massive insider trading scandal of the late 1980s. He was fined $100 million and sentenced to three and a half years in prison.
- Television personality Martha Stewart. She was fined and sentenced to ten months in prison.
- Jeffery Skilling, Enron’s former CEO. He brought the company to the center of an enormous accounting scandal that resulted in him being fined $45 million and sentenced to two years in prison.
Conclusion to Advantages and Disadvantages of Insider Trading
When considering the Advantages and Disadvantages of Insider Trading, the major factors are: The advantages of insider trading, the reason it is commonly practiced, is the potentially enormous financial gains it can provide. The disadvantage is, when conducted illegally, it can lead to public exposure, heavy financial penalties, and a prison sentence.
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.)
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