The only requirement to legitimize these trades is that certain forms must be filled out with the Securities and Exchange Commission (SEC) within two days of the transaction. When corporate insiders of the company issuing stock buy and sell those stocks, that is perfectly acceptable. It’s important to keep in mind that some forms of insider trading are legal. These could be other investors in their company or even financial clients if the perpetrator manages others’ investment portfolios. If investors don’t have confidence in the veracity of their investment, they won’t buy stocks, and companies won’t get the funding they had hoped for.Īnother reason that insider trading is illegal is because it involves the inside trader placing their own interests above others to whom they might own a fiduciary duty. One of the main goals of the stock market is for businesses to raise capital by selling stock. This chain of events can erode consumer investor confidence in the market and impede its overall health. All due to self-serving investment choices made with non-public insider information. This, in turn, can create a bubble that, when it pops, leaves many investors at a loss. Someone with insider knowledge who then acts on that knowledge to buy or sell large quantities of a stock can influence the market, artificially manipulating the value of the stock and creating a financially inaccurate representation of its true worth. If people are rushing to sell off their shares, that can drastically lower the price. For example, if investors rush to purchase shares of a company, that can drive up the price. Oftentimes, the price of these stocks will be influenced by how many people are buying or selling the stock. These markets rely on a fair playing field to function, where anyone with the ability to pay can come and purchase a share or shares within a company or companies of their choice. Let’s take a step back to look at the stock market at large. What is unfair about someone having material information that will help them decide whether to buy or sell shares of a particular stock? Why is Insider Trading Illegal?īy now you may be wondering what is so bad about one person having insider information. These individuals learn what others on the market cannot, giving them an unfair advantage that they can then abuse for their own financial gain. These are all perfectly legal methods of deciding what to buy and sell on the stock market, but what about investors who gain an unfair edge over others through non-public material information about a company? In other words, what about individuals with access to “inside information”? Some traders have even created elaborate analytical programs or software that crunch numbers and deliver statistically backed predictions about what to buy and what to sell. An investor conducting their market research might then turn to more specific market research of a security, such as looking at a company that manufactures hospital equipment and examining its debt to equity ratio and other metrics to see if it’s a good buy. Serious investors conduct market research and perform fundamental analysis of the companies they invest in.įor example, when the Coronavirus pandemic started, certain financial analysts predicted that healthcare stocks would be a solid purchase. How do investors know if and when a particular security is about to take off? Nobody has a crystal ball to make such predictions, but there are a few tools and strategies that can be used to make an educated guess. Though, the most glamorous stock investment method is to capitalize on market movements through buying low and selling high. Dividends are a small share of company profits paid to each shareholder based on the number of stocks they own in that company. There are a number of ways to make money on stocks, and one of them includes collecting dividends. This allows both institutional investors (like big banks and investment firms) and consumers to buy and sell stocks. But behind the sensationalized narrative, what exactly is insider trading? 7 Infamous Insider Trading Cases and ScandalsĪs you may very well know, publicly traded companies sell shares of ownership in their company on the stock market. It brings to mind images of elite stock market traders in suits and ties, engaged in shady backroom meetings to make millions, if not billions of dollars. The words “insider trading” are one of the more exciting financial phrases to be uttered in the news.
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