Insider trading, generally defined as trading a company’s public stock or other securities by someone who has important information that is not public about the company, is usually against the law. However, most people don’t know that it is not always against the law and that insider transactions can be legal under certain circumstances.
When are insider transactions legal?
Insider transactions are legal when the person doing the trading (the insider) makes a trade and reports it to the Securities and Exchange Commission (SEC).
However, if the information used by that individual to make that trade is non-public and material, it is still illegal. Insider trading is a serious white-collar crime, and those who commit the crime face harsh legal consequences.
It is critical for investors, especially those new to investing and trading securities, to understand the ins and outs of trading company shares and what material information is and is not.
Material and non-public information
Material and non-public information is any information about a company and its finances, stocks or other securities that could significantly impact a person’s decision to buy or sell stock that is not available to the public.
In other words, it is purchasing or selling securities with information that the investor should not have because by having that information, they have an advantage over everyone else who would also want to buy or sell those securities.
Penalties
Potential penalties for insider trading include hefty fines and jail time. The SEC and other government agencies are constantly cracking down on these crimes, so people must understand their seriousness and the legal aspects of investing.
The SEC attempts to maintain a fair marketplace for investors, which is why insider trading is illegal and harshly punished. In addition, many of these cases involve millions or billions of dollars. It is critical to understand how the system works and to be knowledgeable about the SEC’s policy on insider trading.