Insider trading is a term mostly heard in connection with illegal conduct. However, the term includes both lawful and unlawful actions. On one side, it incorporates buying or selling stocks or other securities by insiders who possess material nonpublic information about the security. This nonpublic information gives these insiders an unfair advantage over other investors. Laws are set in place to prevent this type of conduct, defined as illegal insider trading, making it a crime.
On the other side, insider trading simply refers to corporate insiders – officers, directors, and employees – buying or selling stock within their own companies. This type of conduct— corporate insiders trading their own securities—is legal, and even common, as long as the trading does not rely on material nonpublic information and complies with all regulations.
1. What is an insider?
An insider is a term referring to directors, senior officers, and any beneficial owners who have more than a 10% stake in a company’s equity. These insiders must adhere to special disclosure regulations with the Securities and Exchange Commission (SEC).
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2. What is material nonpublic information?
Material nonpublic information relates to any minute specifics not accessible to the public, which could influence an investor’s decision to buy or sell shares.
3. Are there consequences for illegal insider trading?
Yes. If any insider uses undisclosed material information to trade stocks or shares, it’s considered illegal insider trading, a criminal offense in many jurisdictions. The consequences include hefty fines and even imprisonment.
4. Can accidental insider trading happen?
It’s possible. Accidental insider trading can occur when someone unintentionally acts on material nonpublic information. This typically happens when insider information is leaked casually or carelessly. However, the consequences remain the same as deliberate insider trading.
5. How to protect against insider trading?
Companies often safeguard against insider trading by implementing policies and procedures that limit when and how insiders can trade company shares. This may include “Blackout periods” or mandatory holding periods. Awareness training also helps ensure everyone recognizes what does and doesn’t constitute insider trading.