- Insider trading is a process that involves information not widely available to the public. When an individual obtains such information and uses it to his advantage to profit in the stock market, this is considered unfair. The person or entity who completed a transaction with the person with inside information was at a disadvantage. This other trader did not have access to the same information, and it may have cost him a great deal of money. Because of this unfair advantage, the Securities Exchange Commission (SEC) has rules against the practice.
- Even though most examples of insider trading involve a CEO of a company or someone else inside the business, you do not have to be an employee of a company to be guilty of insider trading. For example, you could be a government employee who obtains information when the company files important paperwork. You could be guilty of insider trading if you are a friend or associate of someone who works in a company if you invest based on information he provided you.
- To avoid being accused of insider trading, people in prominent roles within an organization have to disclose their investment decisions. For example, if a CEO has a large amount of stock in his own company and wants to sell it, he must first disclose this information to the Securities Exchange Commission. This involves filling out a basic form to provide the SEC with information about the trade he is making. This way, the SEC knows that the CEO is not trying to take advantage of insider information when placing the trade.
- If you are convicted of insider trading, you could face stiff criminal penalties, which could include prison time. A 20-year prison term is the maximum sentence for insider trading, although the sentence could be less, depending on the severity of your crime. A convicted insider trader also might have to pay a fine of up to $5 million per occurrence. Companies guilty of insider trading may have to pay up to $25 million.
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