Insider Trading: How to Stay Out of Trouble
UPDATED: March 2022
Insider Trading: How to Stay Out of Trouble - Everyone knows that owning company stock carries financial risks. However, it comes as a surprise to many employees that trading company stock can actually get you into serious legal trouble, including criminal liability.
Insider Trading: How to Stay Out of Trouble
Two major ways in which you can, even accidentally, break the securities laws are called insider trading and insider tipping. This article will explain what you need to know to stay out of trouble when you trade any company's stock.
The Basics of Insider Trading and Tipping
There's no doubt in anyone's mind that insider trading is illegal. It occurs when someone trades stock or other securities on the basis of what is termed material nonpublic information (MNPI). MNPI is confidential, proprietary information about a company that will affect its stock price either positively or negatively when the information is made public.
Insider tipping is also illegal. It means sharing MNPI with others. The laws against insider trading and tipping apply to everybody. They don't apply only to company insiders or executives, though their positions tend to put them at more risk than ordinary employees.
Insider trading and tipping are considered violations of securities law because they give certain people an unfair investment advantage over other investors and therefore undermine the fair operation of the capital markets. If the capital markets were to lose public trust and confidence, the investment would fall, to the detriment of companies and the economy.
What Constitutes Insider Trading?
The insider trading laws apply to MNPI not only about a company you work for but also about any company you may know through a professional or personal relationship, e.g., through a family member who works for that company or through your company's vendor, supplier, or client. The SEC now wields a formidable array of digital technology to spot, track, and examine links between people involved or connected with suspicious stock trading activities.
The SEC uses sophisticated data analytics, including pattern recognition, to detect suspicious stock trading. The SEC's ATLAS tool lets the agency's staff harness multiple streams of data, including blue sheets, pricing, and public announcements. The tool is routinely used to look for insider trading before a major equity event, detect serial insider trading, and research historical securities prices for litigation.
What is Insider Tipping?
Insider tipping is illegal and closely related to insider trading. It means sharing MNPI (Material Non-Public Information) about a public company that may motivate the recipient to trade that company's securities (e.g., shares or call options). This is illegal because the tipped-off trader gains an unfair advantage over other investors from the movement of the stock price that will occur when the information is made public.
Insider tipping can occur in person, by phone, via the mail, by email, or on the internet. The tipping is illegal if:
- The person who receives the inside information knows or has a reason to believe that the tipper is breaching a fiduciary duty.
- The tipper gets some tangible or indirect benefit from the tipping.
- The tipper passes on the tip with the expectation that the recipient will try to profit from it.
When you tip someone, e.g., a friend or a relative, who then trades securities according to the inside information, you may be held accountable for up to three times the profit gained or loss avoided, plus disgorgement of the trading plans if your tipper can't pay.
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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.)
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