Insider trading is the trading of a public company's stock or other securities based on material, nonpublic information about the company12. Here is a detailed explanation:
- Definition: Insider trading occurs when individuals with access to non-public information about a company use that information to buy or sell securities of that company. This information is considered material if it could reasonably be expected to influence an investor's decision to buy or sell the securities13.
- Legal Status: In many jurisdictions, insider trading is illegal because it is seen as unfair to other investors who do not have access to the information. The laws governing insider trading are complex and vary significantly from country to country. Enforcement of these laws can also vary, and the definition of an "insider" can be broad, covering not only company insiders but also related individuals such as brokers, associates, and family members12.
- Consequences: Trading by corporate insiders, such as employees, is commonly permitted as long as it does not rely on material information not available to the general public. Many jurisdictions require that such trading be reported so that the transactions can be monitored. In the United States and several other jurisdictions, insiders are required to file Form 4 with the SEC when buying or selling shares of their own companies14.
- Penalties: Illegal insider trading can result in severe criminal penalties, including fines and imprisonment. In the United States, the maximum fine is $5 million, and the maximum sentence is 20 years in federal prison56.
- Impact on Markets: Insider trading is considered a breach of fiduciary duty and can undermine public trust in financial markets. It can also lead to market distortions and affect the integrity of the securities markets78.
Insider trading highlights the importance of transparency and fairness in financial markets, as well as the need for strict regulations to prevent the misuse of confidential information for personal gain.
2/28/2025 00:22am
