Insider trading happens when someone purchases or sells stocks while possessing private, material information about that stock.
Insider trading is one of the most notorious offenses investors on the stock market can be accused of. For a trade, either a sell or a buy one, to be considered insider trading, the person involved in the trade should be in possession of undisclosed, private information that can influence the future price of said stock.
One of the main arguments against the legality of insider trading is the stance that non-public, material information can serve as an unfair advantage. For example, suppose a trader receives insider information that a company is planning to buy another company. In that case, this can easily be interpreted as a pre-condition for the increase of the first company’s stock value.
There are instances when insider trading might be legal. Examples of legal insider trading might include:
While these are the extraordinary circumstances when trading on insider information might be permitted, the SEC closely monitors all signals it receives with suspicions of insider trading.
One notable case of insider trading involves The Wall Street Journal columnist R. Foster Winans, who shared information with stockbrokers about an article he was about to publish. Thanks to this insider information, the two stockbrokers pocketed around $690,000, while the journalist’s share of the gains was $31,000. The SEC tried Mr. Winans and the brokers and successfully convicted them of insider trading.
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