Insider Trading: What is it Really?

Insider Trading:  What is it Really?

Insider trading occurs when someone who has a fiduciary duty to another person, institution, corporation, partnership, firm, or entity makes an investment decision based upon information related to that fiduciary duty that’s not available to the general public. This insider information allows them to profit in some cases, and avoid loss in others. 

Insider trading can also arise in cases where no fiduciary duty is present but another crime has been committed, such as corporate espionage. For example, an organised crime ring that infiltrated certain financial or legal institutions to systematically gain access to and exploits non-public information. Perhaps through the use of computer viruses or recording devices, might be found guilty of insider trading among other charges for the related crimes. 

However Insider trading has a fine line that can be drawn between legal and illegal insider trading. An example of legal Insider trading is when corporate insiders, officers, directors, and employees buy and sell stock in their own companies. When corporate insiders trade in their own securities, they should then report their trades through the reports insiders must file to the necessary financial regulators within their country. 

But when Insider trading is illegal it occurs when someone knows important but secret information about a company and then trades that company’s securities. Like stocks, bonds, call options to gain an advantage when the stock price moves after the information is released. Insider tipping is also illegal. It means telling others about secret stock-price-moving information. Financial regulators oppose both trading on and tipping inside information.

Categories: Trading