Many people have probably heard of the term insider trading, but not as many understand exactly what it is. True insider trading can negatively impact the financial situation of everyday investors.
Various people can commit insider trading. Most of the time it is an illegal act, but there are some limited situations in which it is legal.
What constitutes illegal insider trading
Insider trading is the act of buying or selling a company’s securities based on non-public information. Insiders can be corporate directors, officers or company members that control a minimum of 10% of the company’s securities.
However, these are not the only individuals that a court can find guilty of insider trading. If any of these people tip off a friend or family member, and that person trades stock before the information becomes public, that individual also commits insider trading.
When insider trading is legal
According to Business Insider, some insider trading is legal. Legal insider trading refers to insiders trading their own company’s shares. However, they must follow timing guidelines set by the Securities and Exchange Commission, and they must report the transactions to the SEC. They must also provide details of the trades on the correct form.
Penalties for an insider trading conviction
The government takes insider trading seriously, which is why the penalties can be severe. In criminal investigations, there may be stiff fines, prison time of up to 20 years or both. In civil cases, the court may order the violator to return the money made from the security transaction and take back possession of the stock. The court may order additional fines as well.