The ABC of Insider Trading

Anyone who has ventured into the world of stock market investing will have, at some point encountered the term ‘’insider trading.’’ This term alone is enough to make most market players cringe in fear, conjuring images of billion – dollar pyramid schemes and betrayed hardworking investors. It is however interesting to note that despite the infamy that this practice has gained over the years, not many people have a firm grasp on what insider trading really is. The first thing to know is that there are two main forms of insider trading.

Firstly, insider trading can be of a legal nature. In this case, people who hold strategic offices in corporations follow the set out guidelines when buying and selling stock in their firms. This practice is very common, given that employees of companies that are publicly traded, albeit in executive positions, usually own shares or stock in their own firms.

The practice is often considered a form of ‘’insider trading’’ given the fact that the company’s employees possibly have information to their disposal, that is not readily accessible to the general public. The information can take the form of a new product offering, a planned merger or takeover, an upcoming appointment or a great performance report. All these can be factors that impact the company’s share price.  A major feature in this type of trading is that the players have to consistently report their activities to the relevant securities and exchange authority after a sale or purchase of stock.

On the other hand, insider trading becomes illegal when the people on the inside carry on share trade based on information that the general public doesn’t have. When a trader has information about a company and acts on it before the public are aware of it, is regarded as a fraudulent activity. By so doing the general public is considered short changed as the investment playing field is not level or equal.

The penalties of insider trading can be dire. A person can look at up to 20 years imprisonment if successfully convicted of securities fraud. Usually an accompanying charge of mail and wire fraud can be added to the indictment which itself holds a maximum of 20 years in jail as well.

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