Insider trading: What exactly is it?

On Behalf of | Dec 24, 2020 | Securities |

Residents of New York may hear about insider trading happening in their home state often. This is an understandable assumption as New York City is the country’s economic hub. However, insider trading can occur in any part of the country at any time. But what exactly is it? Read on to learn about this common yet often misunderstood term.

What is an insider?

One of the most common misconceptions about insider trading is that the person with the information somehow stole it or acted as a spy. The reality is that they are often an employee of the company and hold some stake in the company such as stocks, securities or other forms of ownership.

Is there legal insider trading?

Yes, there is a form of legal insider trading that involves an employee of the company being able to sell and buy shares of the firm or company they work in. You will often see CEOs and top-level executives buy out shares to gain additional power. The only requirement is that these transactions are reported to the Securities and Exchange Commission.

Illegal insider trading

Because high-level executives and some employees receive news of the company’s financial status before the public, it can be easy for someone to turn around and disclose this information to those willing to pay for it. However, there are other ways that insider trading occurs. For example, if a high-level executive is riding in a taxi and the driver hears information about their non-public quarterly report and then uses or sells that information, then it can also be deemed as insider trading, even if the driver doesn’t work for the company.

As you can see from the information above, there are many forms of insider trading. If you are accused of this crime, it is important to ensure that you have legal representation at the ready.

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