Unwrapping the Mystery of Insider Trading: What is Insider Information?
Insider trading is a term that often scares away investors and traders because of its negative connotations. But what exactly is insider trading, and what is insider information? In this article, we will be uncovering the mysteries of insider trading, exploring what insider information really is, and how individuals can avoid getting involved in illegal insider trading practices.
What is Insider Trading?
Insider trading is the buying or selling of securities by individuals who have access to non-public information that can impact the price of those securities. Basically, insider trading occurs when someone uses confidential information to make a profit in the stock market. Such data may include financial reports, acquisition plans, and vital company information not yet released to the public eye.
Laws prohibit insider trading as it creates an uneven playing field, allowing a select few to profit unfairly. It not only causes financial stress but can also impact the reputation and integrity of the company responsible for the data leak.
What is Insider Information?
Insider information is any data that has not yet been made public but, if revealed, is likely to impact the stock market. It encompasses information acquired through employment, insider knowledge gathered by a person who owns more than 10% of the company, or someone who seeks confidential information from a person bound by a confidentiality agreement, such as a company advisor.
As an investor, the rule of thumb is to always steer clear of non-public information about a company. However, such information often makes its way into the hands of individuals, leading them to use that information to make a profit. Having such unethical practices represents an abuse of trust and leads to financial and legal ramifications.
Examples of Insider Trading
In 2017, the Securities and Exchange Commission charged a former employee of Goldman Sachs with insider trading. He employed his position to illegally gather market-sensitive data related to the acquisition of a well-known company by a private equity firm. With his insider knowledge, he purchased the company’s stock before the acquisition took place, netting over $400,000 in illicit gains.
Similarly, in 2020, a West Virginia Supreme Court Justice was sentenced to federal prison for inadvertently engaging in insider trading. He admitted to buying and selling stocks in an energy company, intending to buy at a low price and sell high as the company’s value surged. However, he had no idea such information was not publically available, and his trades left him with a sentence of two years in federal prison for violating the law.
How to Avoid Insider Trading
The best way to avoid insider trading is to stay informed. As an investor, it is essential to understand market trends, analyze financial reports and publicly available data to make informed trading decisions. It’s best to steer clear of shortcuts or reliance on insider knowledge to avoid legal and financial risks. It is also important to know the legalities of insider trading. Investing in excellent educational resources, keeping yourself updated on rules and regulations, and consulting a professional advisor can also help you stay on the right side of the law and make informed trading decisions.
Conclusion
Insider trading is illegal and can cause serious legal and financial problems, destroying the reputation of individuals and companies. Insider information may seem like a shortcut to making a profit, but it is essential to remember that it is risky and against the law. Investors should always research and analyze publicly available information for their trading decisions, avoid getting involved in illegal insider trading, and always strive to invest ethically and with high integrity.
