Stocks and bonds may be good investments. There have been some people who have used insider trading in order to have an unfair advantage at selling or buying stocks. Here’s a look at why it’s illegal to conduct insider trading in California and elsewhere in the United States.
The basics of insider trading
Insider trading is when someone with crucial nonpublic information about a publicly traded company’s stock buys or sells this stock. They use this knowledge to gain an unfair edge over other people. This can have far-reaching consequences, not only for the person who conducts insider trading. It’s in a similar category to embezzlement, which also involves an employee or other trusted party using their position illegally to achieve financial gain and breaking that trust.
The Securities and Exchange Commission has rules in place that are meant to protect investments from being affected by insider trading. However, it isn’t necessarily a simple matter to pick up on when someone is committing insider trading. Most instances are considered to be controversial and there will be a great deal of dispute over such cases. There’s plenty of media attention when this occurs, especially if the individual will face serious consequences to their reputation for even being involved in this type of case.
Insider trading is a tricky matter
People who work for or are otherwise involved in a company and own stock in that company are allowed to trade that stock. It can be a fine line here, as they need to ensure they don’t use any information they obtain that isn’t also available to the public to make decisions about a particular stock. It would be a breach of their fiduciary duty, which means that they are going against the responsibilities and role of their position in the company. It would have the effect of potentially leaving many other people at a disadvantage.
No matter what the payoff is in using one’s information to benefit them in selling and buying a particular stock, there can be truly damaging consequences. It’s not worthwhile for someone to risk their career and freedom, as well as the financial harm it can do to many people.