Why is insider trading bad for the market?

 

What is insider trading?

The U.S. Securities and Exchange Commission examines the potential issues that stem from insider trading. Insider trading happens when an individual uses information not yet available to the public in their stock decisions.

For example,  as an employee, perhaps you may become aware of an impending bankruptcy. Fearing this will cause stocks to plummet, you quickly trade yours. This is an act of insider trading.

You do not need to use this information for your own benefit, either. Under law, you are also guilty of insider trading if you share information with others and they use it for their own stock decisions.

Why is it a problem?

Why is it such a bad thing? In essence, the stock market builds itself on a foundation of trust. Investors must trust that the stock market is a fair system. If this trust is not present, investors will not partake. This could cause the collapse of the entire system.

Due to the severe threat associated with insider trading, the penalty is harsh. You could face up to 20 years in prison. On top of that, you may face a criminal fine of up to $5 million.

For a consultation with our SEC Attorneys, contact Hilder & Associates P.C. 

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