What is Insider Trading?

With all of the unspoken rules and written laws governing the market, it may feel overwhelming at best when you dive into buying, selling and trading. But there are some things you need to understand before diving in, or you risk facing legal repercussions.

Insider trading falls into this category. Though it might not seem like a big deal at first, it can net you some serious penalties.

Examples of insider trading

The U.S. Securities and Exchange Commission discusses insider trading, a seemingly benign action that negatively impacts the market. Insider trading is, simply put, the use of inside information that other people do not have access to make decisions about buying or selling stock.

However, insider trading can often happen in ways you do not expect. For example, if you are an employee who knows your business will soon file for bankruptcy, you may feel tempted to sell your stocks as soon as you learn this. But that is insider trading, as having the information about oncoming bankruptcy puts you at an unfair advantage against others in the market.

Why is this a problem?

You may wonder why this is such a big deal. In short, it puts the faith of investors in jeopardy. If they do not have a guarantee that everyone is playing the market fairly, they are less likely to invest. This can singlehandedly cause a market crisis if enough investors begin to withdraw or invest in a more reserved way.

Thus, the penalties for insider trading are quite harsh. You may face up to 20 years in prison or up to $5,000,000 in fines depending on how much money the crime involved.