Why is Insider Trading Illegal?
The US Securities and Exchange Commission (the SEC) defines an “Insider” of a company as any officer, director, or employee with significant knowledge that is confidential. So when an Insider is accused of trading these secrets, it is a “breach of fiduciary duty” and thus considered illegal. An Insider is not only restricted to those within the company. Colleagues, friends, family, anyone that is privy to this private information by the aforementioned individual are considered insiders. In addition, all those who may have had access to the information will be classified as an insider.
In relation to the stock market, insider trading is the trading of stocks and securities of a public company based on this knowledge that is not available to the public. There are firm and inflexible rules in place in order to buy, sell, and trade stocks. You can imagine how important it is to adhere to these rules as the market is incredibly complex and can affect a country’s entire economy (as well as the businesses involved. Trickling down to the individuals whose lives can be severely altered). A clear, unfair advantage would be given to those who break this rule in favor of playing the market. The pertinent information does not always result in a profit but may also be used to avoid a potential loss.
This major breach in trust is not tolerated. In order to regulate the activities of public companies, the trading activities of a company’s officers, directords, and other members must be reported to the SEC.