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.
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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.
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.
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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