Why Is Insider Trading Such A Big Deal?

Diving into the market can prove massively intimidating at first. Between buying, selling, trading and more, it might feel possible to make a misstep at any turn.

This is why it is important to know the legal repercussions you could face for some of these potential missteps, such as insider trading.

What is insider trading?

According to the U.S. Securities and Exchange Commission, insider trading proves problematic on many different levels. But what is it?

Simply put, insider trading is the use of “inside information” to get a leg up in the stock market. For example, a business employee will know before the general public if their business is about to file for bankruptcy. If they choose to sell their stocks acting on that knowledge, it is technically insider trading.

This can also apply if an employee tells someone else about this inside information, and that other person chooses to take action based on what they learned.

Why is this bad?

In short, the market exists on a thin network of trust. Investors trust that they engage with honest people and fair practices.

Insider trading gives one person an unfair advantage over the others. Thus, it can begin corroding the sense of trust that everyone has in the system, leading to fewer investors engaging and the eventual collapse of the market itself.

What are the penalties?

To help circumvent these outcomes, the penalties for insider trading are often quite harsh. It can include up to $5 million in fines or up to 20 years in prison, or both.

Thus, to avoid these outcomes, it is best to steer clear of engaging in insider trading at all.