Insider Trading and Why It Is Illegal

The stock market is an important and complex place as it can affect the wellbeing of a country’s economy, businesses, and individuals. As such, there are stringent rules in place regarding the buying, selling, and trading of stocks. One of said rules is regarding insider trading. Insider trading is defined as the trading of stocks or securities (of a public company) following given the knowledge of some crucial company information that is not available to the public. According to the US Securities and Exchange Commission (SEC), insider trading is illegal as it is a “breach of a fiduciary duty” on the part of the insider.

The SEC has defined an insider of a company to be its officers, directors, and employees with significant confidential knowledge. However, an insider can also be external to the company as well. For example, if any of the aforementioned individuals give their friends or associates access to said non-public information, the latter will also be considered insiders. Furthermore, anyone else that might have been provided access to the information because of printing needs, the law, etc. will also be classified as an insider.

As mentioned previously, insider trading is not tolerated as it is deemed unfair for someone on the inside to trade their stock or securities while those who are not privy to such information do not receive the same advantage. Furthermore, as part of the insider’s fiduciary duty, it would be a major breach to use insider information to avoid a potential loss or to make a massive profit. Therefore, public companies must disclose to the SEC the trading activities of its officers, directors, and other members with knowledge of non-public company information.

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