Understanding the Different Types of Insider Trading

The different types of insider trading you should know about

UPDATED: March 2022

Understanding the Different Types of Insider Trading – The Securities and Exchange Commission (SEC) continues to lead a serious crusade against insider trading, and for good reasons.

Understanding the Different Types of Insider Trading

You need to be clear on the different types of insider trading present today if you are to make it work in your favor. Contrary to popular belief, not all insider trading activities are illegal. To be on the safer side of the law, we will need to go into all the vague details that separate legal and illegal insider trading activities.

Legal vs. Illegal Insider Trading

Legal insider trading happens all of the time. You’ve probably heard of employees of a publicly listed company trading equities of a company they are working in. Insider trading of this nature is perfectly legal as long as corporate insiders report their trades in the correct manner depicted by SEC regulation.

However, illegal insider trading refers to any activity based on corporate information that is not disclosed to the public. Such trading activity undermines everyone’s confidence in the integrity and fairness of the equities market. Additionally, it is deemed as a breach of trust and fiduciary duties of the employee to the company.

In most instances, the line that separates legal and illegal insider trades is clear and obvious. However, there are some cases when that line can be muddied up a bit. For example, when a trader overhears an important conversation between two executives of a company and proceeds to trade the company’s stock based on the information he heard.

You can make an argument of that trade being unethical and unfair since it does make use of information that’s not available to the general public. However, the law doesn’t encompass this scenario, so it is still considered legal.

Types of Illegal Insider Trading

There are certain types of illegal insider trading that you should be aware of if you are thinking about trading in the market today. These include the following:

* Classic Insider Trading

The most widely understood illegal insider trading activities are classic ones where a company’s top-level executive knows undisclosed information of the corporation and buys/sells company stocks based on those non-public materials. The details may vary slightly, but in this instance, it’s a clear-cut illegal insider trading scenario.

* Insider Tipper and Insider Tippee

A common illegal insider trading scenario is when an employee of a company who is privy to essential non-public information doesn’t trade the company’s stock directly. Instead, he passes the information to another person who will use the information to profit from it. In such cases, both the tipper and the tippee are liable for illegal insider trading activities.

*  Misappropriation

Another illegal activity closely related to insider trading is the misappropriation of a company’s information for personal gains. For example, an investor is being invited by an investment banker who is trying to gather capital for a certain company. The investor was asked to sign a non-disclosure agreement.

The banker proceeded to give the investor the company’s state and why it needed to raise capital. The investor refused to take part in the offer, but when the meeting is done, the investor called his broker to sell his shares of the company. The investor is guilty of misappropriating information given to him in confidence and trust.

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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 .

Advantages and Disadvantages of Insider Trading

Figuring out the pros and cons of insider trading and how it can benefit you

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.

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.

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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 .