Insider trading and why you must avoid it!

By Mike


Insider trading is one of those things that we all hear about. Yet few know what it is and tend to think (incorrectly I might add) that only the big hedge fund managers should worry about trading on “inside information”. It always seems like investors think that they are above the law.

Now to be fair, yes the SEC generally pursues only higher profile cases. And so when an investors makes a $1,000 profit based on illegal information, there will usually be no action taken therefore no penalty. But is that really a chance you want to take? The consequences of insider trading can lead you directly to jail as it did for Martha Stewart when she got caught. And it seems like every once in a while, some high profile case is brought to the public’s attention, just to remind us all that these things are still being looked at by the SEC.

Before starting, I should further clarify because there are two types of insider trading:

1-Trading done by executives of a company. When the CEO or a high ranked officer of Microsoft does a trade on his stock, he must disclose the trade which becomes public information. This was done because investors usually want to know if company executives are selling their stock. It is may be that they expect the company’s stock to underperform in the short term.

2-The other type is the one that is illegal: When any investor does a trade based on material non-public information. Basically, any investor that has knowledge of facts that will have an impact on the stock is prohibited from trading on that stock. This can apply to anyone:

  • You work at a company and hear from an accountant or exec that the results will be higher or lower than expected. In such a situation, you would not be allowed to trade on your company’s stock.
  • Your neighbour tells you that his company is preparing to make an offer to buy a stock and that he is buying that stock because he is confident it will rise. In this case, your neighbour is violating federal laws as are you if you trade on one of those two companies.

It is tempting to do such trades, of course, because you will probably end up making a tidy profit. But before acting, just remember that it is a crime like any other. It is especially tempting since you know that the chances of being pursued and perhaps caught are very slim (these cases are rare and very difficult to prosecute) and also simply because of greed. If you own a stock that you find out will probably drop, you will feel very tempted to sell it before the drop actually occurs. But just take an extra minute to think about how much this could end up costing you”¦.

author: Mike

image source: anonymous9000

2 Responses (including trackbacks) to “Insider trading and why you must avoid it!”

  1. Financial Samurai Says:

    Great advice! I also advise people not to kill each other. Definitely good to be nice and peaceful.

  2. Mac Danton Says:

    I think your blog post was probably a good start to a potential series of blog posts about this topic. A lot of users pretend to understand what they’re preaching about when it comes to this stuff and most of the time, hardly anyone actually get it. You seem to really dominate it however, so I think you should take it and run. Thanks!