What is Insider Trading

Insider trading means disclosing material information of the company to individuals who are not associated with the company in any manner. Insider trading is an illegal offence and strict rules are laid against those who practice such unfair means to make their ends meet. This trading at times can be legal and such legal trading is believed by critics to work in favor of corporations that are publicly traded.

Although the companies that are publicly traded give the right to their employees to trade the stocks yet they are expected to abide by certain limitations. It is their responsibility to report to the SEC (Securities and Exchange Commission) about the stock trading to prevent insider trading that is deemed as illegal.

The trading of stock is broadly of two categories, legal and illegal. Legal trading permits executives and employees of a company to actively participate in their own stock trade. Illegal trading does not allow the executives and employees to disclose the material information about the stocks to any outsider. For the prevention of such illegal trading, the Securities and Exchange Commission has laid down certain guidelines which must be followed by insiders of a firm while trading of stock to outsiders.

Certain securities laws are enforced by the Securities and Exchange Commission for the prevention of such illegal insider trading. They also emphasize on the regulation of all the securities industry. Most corporations offer their employees benefits package which include actual stocks or stock options. The employees are given the right of trading but simultaneously instructed to prepare an assessment record of the stock holdings they deal in.

This assessment record needs to be filed by the executives and employees and is considered to be major step against all malpractices that give rise to illegal insider trading. Anyone who has an access to private information about any particular company is termed as an ‘insider’. Such private and confidential information are not publicly available to anyone else other than the consultants and employees of the company.

Both legal and illegal insider trading is practiced by chairpersons, executives, officers or shareholders. The people who indulge in such stock-trading are often one of these insiders of the corporations. The employees who do not hold a high designated job often do not indulge in such practices due to lack of sufficient information about these highly confidential matters.

People involved in such insider trading often do so out of greed least thinking about the outcomes it might have on the company’s performance. There are strict penalties for people engaged in such illegal trading. However, it is a common misconception among people that if this illegal trading is done unintentionally or without knowing that they are illegal, then they are barred from such penalties. This is myth and in any case the penalty has to be faced whether they are done unintentionally or intentionally.

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