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What is insider trading?

It seems like there are constant news stories about insider trading. You may be familiar with the incident that sent Martha Stewart to federal prison. But you do not need to be wealthy or famous to be guilty of this white-collar crime. In fact, it is possible to commit insider trading without even realizing it. 

But you may still be unsure about exactly what insider trading is and how it works. Here is a look at this unique white-collar crime and what the consequences of engaging in it may be.

Definition

According to the SEC, this corporate insider crime occurs when someone:

  • Has a fiduciary duty to another individual or entity
  • Possesses nonpublic information about a security
  • Buys or sells the security

Insider trading also may take the form of tipping private information and committing corporate espionage.

Examples of inside traders

People who may be found guilty of trading insider information include:

  • Directors
  • Corporate officers
  • Employees
  • Lawyers
  • Bankers
  • Brokers
  • Government employees
  • Business associates
  • Friends
  • Family members

Just about anyone who receives confidential information about corporate developments and trades it may be committing a white-collar crime.

Legal insider trading

You should know that not all instances of insider trading are against the law. The SEC notes that there is a legal version of the practice, which happens when a corporate insider buys or sells stock within their own corporations. If you do this, you must report your trades. 

Punishments

Insider trading may result in anything from monetary penalties to federal imprisonment. The penalty varies depending on the severity of the crime. The SEC also bans violators from serving in executive positions in public companies.

You may accidentally conduct insider trading. Even committing this act by accident may result in losing trading licenses and criminal prosecution. If you are facing charges for this type of crime, make sure you consult a defense lawyer.

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