Insider trading is often discussed, but it is something that many do not fully understand, or there is a concept of it but no proper comprehension of what it is and how it can occur. To learn more about insider trading, keep reading.
What is insider trading?
Insider trading is an illegal, prohibited activity when someone makes an investment trade based on non-public “material” information. The advantages of insider trading are potential profit for participants. However, the disadvantages of insider trading are a considerable risk – conflict with the law and the possibility of being convicted.
Whenever a publicly traded company has a stock sold by a person who may have any information concerning a particular stock that has not been released to the public and is then sold or bought, that is what insider trading is. This type of trading may be legal or illegal; however, it depends on when the insider has made the trade. It will be considered illegal whenever a stock is traded based on information that has not been released to the public or is considered non-public.
What is Insider trading Material Information?
Any information impacting an investor’s decision to purchase or sell security will be considered material information. In addition, any non-public information will be information that has not been legally released to the public about material information on safety.
A better understanding of what Insider trading is:
The SEC or United States Securities and Exchange Commission, has defined insider trading as selling or purchasing a security, fiduciary duties are breached, or another type of trust or confidence relationship based on non-public information about said security.
The overall question about insider trading’s legality comes from the SEC’s attempt to keep the marketplace fair. Someone who has access to non-public information will be seen as having an unfair advantage over any other investor who would not have equal access. Investors may make a much larger profit than any other fellow investors.
Whenever an investor begins to tip off other investors with any non-public information, they may be seen as illegal insider trading. However, when a company director starts to sell or purchase shares, but this information has been disclosed about the transactions legally, it will be seen as legal insider trading. However, the SEC has a specific set of rules to help protect any investment from any effects of insider trading.
Advantages and Disadvantages of Insider Trading
The advantage of insider trading is the enormous financial gains for participants. The disadvantage is the possibility of harmful public exposure, heavy financial penalties, and a prison sentence.
Advantages of Insider Trading
Insider trading is a practice that offers many advantages to those who participate in it. Perhaps the most significant of these benefits is the potential for enormous financial gain. By using access to private information or market knowledge that is not available to the general public, insiders can engage in profitable trades that other investors might not be able to execute.
In addition, insider trading allows participants to avoid risk by hedging their bets or adjusting their positions as needed. Because insiders are privy to certain information about upcoming events or trends, they can make effective decisions about where and when to buy or sell various assets to maximize their returns.
Furthermore, insider trading incentivizes market participants to work harder and stay informed about developments in their fields of expertise. Because individuals who succeed at insider trading are often rewarded with large bonuses or promotions, they are motivated to maintain their competitive edge and continue performing at the highest levels.
Overall, the advantages of insider trading are numerous and include financial rewards, reduced risk exposure, increased efficiency, and improved performance among market participants. Whether you are an investor looking for growth opportunities or simply interested in what drives people’s decisions within the markets, insider trading should be on your radar as a powerful tool for success.
There are no good things in insider trading for society – it is forbidden, not legal. Sometimes it is hard to prove illegal insider trading. The advantage of insider trading is profit (the only benefit of insider trading), but we will discuss more disadvantages here.
Disadvantages of insider trading
- Bad public reputation
- Heavy financial penalties
- Prison sentence
Insider trading disadvantages include a negative impact on public perception and the severe financial penalties that can be imposed for engaging in this practice. In addition, it can result in jail time for those caught and convicted of insider trading.
Across industries and sectors, insider trading casts a shadow on financial markets and erodes trust in the system. This damages the reputation of individual companies and investors and undermines the economy’s overall health.
In addition to these societal costs, those who engage in insider trading face significant financial penalties if caught by regulatory authorities. In some cases, individuals may even face prison if they are guilty of engaging in this unethical behavior.
Thus, while insider trading may offer certain short-term benefits to those who engage in it, it is not worth the long-term risks and potential consequences involved. To maintain a fair and healthy financial market ecosystem, we must take steps to prevent insider trading at all costs.
Insider trading examples
1. Martha Stewart insider trading case
In 2004, Martha steward, a famous television star and personnel, was convicted and charged with insider trading. It was reported that she received insider information about the ImClone systems company. She accepted that the FDA had declined to review one of their developed drugs, which would incur a massive loss in the future. Regarding that information, Martha sold a certain percentage of his shares to avoid the loss. Martha also lied that she had prior plans for selling the shares. This was later found to be a lie. She was convicted of two crimes. She was guilty of both insider trading and lying. The star was then sentenced to five years in prison.
Let us start from the beginning. It is not just a company director that could be charged with insider trading. A vast and public insider trading case happened in 2003 when Martha Stewart, a trendy household name, was accused of securities fraud, obstruction of proceedings, and insider trading from ImClone’s point during 2001 the SEC.
Martha Stewart sold around 4 thousand shares that she owned in ImClone Systems, a biopharmaceutical company. Stewart had received information from a Merrill Lynch broker, Peter Bacanovic. Bacanovic had received a tip after the CEO of ImClone Systems, Samuel Waksal, had sold all his shares for that company. This happened when ImClone had been waiting to be approved for a new cancer treatment called Erbitux by the FDA.
However, after the stocks had been sold, Erbitux was rejected for approval by the FDA, which caused the shares to drop over 15% in a single day. However, Martha Stewart selling these shares kept a loss of around $45,600 from happening. Yet, because this sale had been made using information received from Bacanovic, who had learned this information from Waksal when the shares of ImClone were sold, it had been considered non-public information.
Martha Stewart went to trial in 2004 and was charged with conspiracy crimes, providing the federal investigators with false statements and obstruction of justice, which caused Stewart to spend only 5 months in federal prison.
2. Marc Cuban’s insider trading case
Mark Cuban, a famous entrepreneur and owner of the Dallas Mavericks, was accused and charged with insider trading from the mama.com stock. It was reported that Cuban got confidential information from the CEO of Mamma.com stock of a predicted loss. He then sold his shares before the data was released to the public. This was a selfish act that made him avoid a loss of an estimated 750 thousand dollars. However, this brought conflict between Cuba, the exchange commission, and securities, who reported a case against him in 2004.
3. Chris Collins’s insider trading case
Chris Collins, a significant shareholder of the innate immunotherapeutic biotechnology company, was accused and charged with inside trading in August 2018. It was reported that Chris leaked internal information to his father-in-law. The information was about the negative test trial of sclerosis drugs that the company made. The drugs were meant to cure his son. Before releasing this information to the public, the two men sold their shares to avoid substantial potential losses.
4. Phil Mickelson insider trading case
Phil Mickelson, a professional golfer, was charged with insider trading in May 2016. It was reported that Phil made a stock trade with the dean’s food daily company after he received insider tips for making huge profits. However, there was not enough evidence against his accusations. He was then ordered a fine for giving up a certain percentage of his trading interest and profit. This insider trading case is interesting because the scandal is based on inside information that he had received second-hand.
5. George Soros insider trading case (2002). In 2002, George was charged with insider trading and was convicted in the Paris court, leaving him with a fine of more than two million dollars. It was reported that George Soros acquired confidential information about a corporate raid In Societe Generate bank. He then sold his shares to avoid loss before releasing that information to the public. George Soros fails To clear his name of insider trading in France.
6. Jeff Skilling’s insider trading case
Jeff Skilling is a former CEO of the great Enron company. It was reported that Jeff illegally sold his massive shares from the company a few months after he resigned as the company’s CEO in August 2001. This action left the company in bankruptcy. He then lied to the investors about the reasons behind the company’s substantial financial losses and bankruptcy. He was charged and convicted in court for lies and insider trading.
7. Joseph Nacchio insider trading case
In 2005, the government accused and convicted Joseph Nacchio, the former chief of Q west telecom company, for insider trading. Why? It was reported that he gave false information to wall street about the growth of this company. He took advantage of the company’s low moments and challenges and dumped his stocks in the market, making a considerable profit. This left the company at a massive loss of more than three billion dollars. In April 2007, Joseph was sentenced to six months in prison.
8. Billy Walters’s insider trading case
A famous US gambler, Billy Walters, has been charged with several insider trading cases that have selfishly earned him huge profits. Billy Walters acquired insider information from Thomas Davis, the former chairman of the dean’s food company. He later bought stocks from this company to grab the opportunity of earning a considerable profit. The insider trader was then convicted and sentenced to five years in prison.
9. Ras Rajaratnam insider trading case
Ras is a famous businessman and founder of the galleon group of investors. He was accused and charged with insider trading, which led to the closure of his firm. It was reported that raj collaborated with castle hedge fund managers to acquire insider information about the firm. He later made the stock market in that firm, which made him a considerable profit. Raj was also involved in nefarious activities with firms like Google, Goldman Sachs, and several other investors.
10. Lean Cooperman insider trading case
Lean Cooperman, 73-year-old CEO and founder of Omega advisors, was accused and convicted of insider trading in 2010. He allegedly collaborated with Atlas pipeline partners to acquire insider information and traded stock securities in his favor.
11. The case of Amazon and Insider Trading
Brett Kennedy, a former financial analyst for Amazon.com Inc. or AMZN, had been charged with being an insider trader in September of 2017. It was reported that Kennedy had provided Maziar Rezakhani, a fellow alumnus from the University of Washington, with information for the first quarter of 2015 earnings before they had ever been released to the public. What made it illegal was that Rezakhani had given Kennedy $10,000 for this non-public information because Kennedy’s announcement allowed Rezakhani to make over $115,000 in trading the owned shares of Amazon.
Legal Forms of Insider Trading
When insider trading starts to be used, this term is often in a negative manner. However, there is often insider trading happening legally in the stock exchange every single week. This can only be done because of the SEC’s requirements that all transactions have been electronically submitted in a specific time frame. All electronically submitted transactions go directly to the SEC, while this information is disclosed on any company’s website.
One of the first steps in providing legal disclosure of company stock transactions was caused by the Securities Exchange Act of 1934. All major owners and directors must disclose transactions, stakes, and any changes in ownership. Specific forms are used to show this information to the SEC. Form 3 will be used as the initial filing, showing company stakes. The following form that has to be completed is Form 4, which will be used to disclose the company stock transaction in a total of two days after the sale or purchase. The final form is Form 5, which will be used to declare any early or deferred transactions.
Insider trading can be a concept that may be hard to comprehend at specific points, but the main takeaway points are as follows:
Based on information from the SEC, legal insider trading is possible as long as it can conform to all rules made by the SEC.
Insider training is seen as the sale or purchase of stocks in a company that is considered publicly traded by a person who may have access to material information that is non-public or has not been released to the public about that particular stock.
Material information is seen as the information that may impact an investor’s decision to purchase ng selling securities. Conversely, non-public information will be material information that has not been provided to the public legally.
Conclusion
Several scandalous cases of insider trading have occurred over the last years in different countries. The word insider trading has some negativity. I mean, it is perceived as an illegal and fraudulent kind of business practiced worldwide. However, the rules and regulations governing this kind of trade vary from country to country. Far from expectations, insider trading can be legal. This is shocking. But yes! It is conditionally allowed in some countries. It is permitted depending on the time of the trade. It is also allowed when corporate insiders trade public securities but report to the exchange commission or securities for public disclosure. What is insider trading? This is the buying and selling public securities or stocks by selfish individuals who breach trust or confidence. They take advantage of power while possessing secret or non-public information about the securities. Insider trading is often termed illegal and unfair to traders who cannot access first-hand information. This is because every shareholder has equal rights in an investment.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
