You may have seen stories in the news about business people getting arrested for insider trading, but this crime is still frequently misunderstood. Insider trading is a type of unethical behavior that’s associated with investing in stocks. Certain types of insider trading are illegal, so you need to know how to spot it and report it if you encounter it. Keep reading to find out about insider trading.
To learn about the basics of insider trading, you should know who is considered to be an “insider.” Insiders are people who have access to nonpublic information about a company or people with stocks equal to 10 percent or more of a firm’s equity. If an insider is buying and selling shares in the company, it technically counts as insider trading. In more casual terms, insider trading is used to refer to an insider using privileged information to make an investment decision. “The more infamous form of insider trading is the illegal use of non-public material information for profit.”
When most people talk about insider trading, they are using the term to discuss illegal versions of insider trading. However, it is possible for a person to conduct insider trading without breaking the law. Legal insider trading occurs when people who own 10 percent or more of the company are buying and selling their company’s stocks while being careful to follow Securities and Exchange Commission (SEC) regulations. This requires them to register any transactions and make advance filings properly. By following protocol, insiders can trade in their company without using insider information unethically.
“The first step to consider is whether the insider trading is actually illegal. Insider trading is against the law when the trader makes a transaction based on material information that isn’t available to the public at large.” In illegal cases, a person uses the private information to make a profit or avoid a significant loss. It is not just illegal to use private information if you work at the company itself. A person who obtains information by bugging a corporate office, getting tips from a brother-in-law, or overhearing a phone call can get into legal trouble for insider trading. Penalties can vary based on the severity of the crime, but a person may be at risk of fines and jail time if they participate in illegal insider trading.
Laws about reporting or “whistleblowing” on those who take part in insider trading are fairly complex. If you work at a company with an internal compliance program, you may need to report it to your compliance officer first. Reporting insider trading to the government is done through the SEC. You can report it personally, or you can get an attorney to handle the reporting for you if you wish to remain anonymous. After getting a tip, the SEC’s enforcement staff will begin to investigate. In some cases, whistleblowers may be eligible for a reward if they let the SEC know about insider trading.
Insider trading is a somewhat complicated subject with many rules and regulations. It can be legal if it is recorded properly, but it is typically illegal to use private information to enrich yourself using the stock market. A lot of controversies can be associated with your business if you participate in insider trading. Read this article next to know how to handle controversy for your business and good luck with your investment trading!
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Matthew King is the owner of the Startup Forums, Alkries LLC, and co-owner at TR King Insurance Marketing. Partner at Independent Life Insurance Agent Association, Medicare Training 101, and Final Expense 101. When he's not creating content about running successful businesses here. He's most likely developing processes, diving into SEO, or gaming with his friends and wife.
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