What does insider information mean?
Insider information is knowledge about a public company’s plans or finances that hasn’t been shared with shareholders yet. If this information is used, it could give the person who has it an unfair advantage. Buying or selling stock may be illegal based on information you can access.
Executives who work for or are connected to a public company usually have access to insider information.
How to Understand Insider Information
A small group of people inside a company always knows about something that will significantly affect the stock price once it comes out. It could be an upcoming merger, a recalled product, a sales drop, or a big project’s failure. If things get terrible, there could be a financial crisis about to come to light.
People who know are not only sworn to secrecy. The law says that they can’t use that information to their advantage by buying or selling stock in the company or giving it to someone else who does.
When vital information has not been made public and is traded on, this is called insider trading. It is seen as unfairly taking advantage of the free market to help some people. Ultimately, it makes people less sure about the market’s honesty, which can slow economic growth.
Putting rules on trading and insider information
Insider trading is when someone uses confidential information or tells someone else to make trades based on that information.
People who work for the company own stock and sometimes buy and sell shares. Insider selling isn’t always against the law.
Insider trades allowed in the U.S. are overseen by the Securities and Exchange Commission (SEC). The 1934 Securities Exchange Act rules how a company’s executives, directors, and workers can trade its stock.
Since the law was passed, several high-profile securities fraud decisions and laws that close loopholes have added to the definition of insider trading that can be enforced.
For example, the Congress passed Regulation Fair Disclosure (Regulation FD) in 2000. This law was meant to stop companies from giving certain owners or traders unfair information. It says that if a company gives information that isn’t public to someone who wants it, they have to make it public so that all buyers can see it.
Trading based on insider information is a significant fraud crime that the SEC prosecutes. People who are found guilty can be fined or put in jail. Business magnate and TV personality Martha Stewart was charged with securities fraud and other crimes in 2003 after using inside knowledge to trade to avoid a loss. She spent five months in jail and had to pay back $45,673 plus $12,389 in prejudgment interest and a civil penalty of $137,019.
Conclusion
- Insider information about an openly traded company that could help investors isn’t available to the public.
- Private trading is the illegal use of private information to help investors decide whether to buy or sell a stock.
- The Securities and Exchange Commission oversees legal insider selling.
