What is insider trading and why is it illegal?

What is insider trading and why is it illegal?

On Behalf of | Dec 29, 2020 | Investment Fraud |

Florida law treats securities fraud in a serious way. If you are facing such charges, your entire life could change. You can expect to deal with a minimum of a fine and prison sentence if convicted.

One common example of a securities fraud is insider trading. But what exactly is it? And why is it illegal?

What is insider trading?

Cornell Law School takes a look at insider trading. According to them, insider trading involves the illegal use of “inside information” from a company. Specifically, you use this inside information to make stock market decisions before the general public gets a chance.

For example, an employee at a company may get inside intel that the company is about to file for bankruptcy. The general populace does not have this information yet. This employee then sells the stocks for this company, knowing that it is about to lose value. This is insider trading.

Why is it illegal?

Why is it illegal? For the simple fact that it gives the person committing insider trading an unfair advantage over everyone else in the stock market. The stock market must function as an even playing field in order to keep things fair for everyone. Unfair advantages edge out the competition and cause people to lose money when they should have kept it.

Note also that federal law defines insiders as company directors, officers or someone who controls at least 10 percent of the equity securities. But giving friends tips with inside information now also constitutes a securities fraud. A loophole once existed that made it difficult to prosecute individuals who got information without being “insiders”, but courts have since closed it.