Insider Trading

by Investing School on October 16, 2009

Most people are not aware that insider trading is legal.

When securities are bought or sold by an individual who has information that the public is not privy to, an illegal transaction occurs. However, once that information is made public, trading by a company executive or other insiders is not an issue.

When the public is not informed about insider developments, such as lucrative mergers or takeovers that are to occur in the near future, any insider (including family members who are not even employed by a company) are not allowed use this information to profit. This includes buying or selling securities as well as passing the information onto others to do the same.

The Securities and Exchange Commission requires that all insiders submit a report on all their transactions. Although most governments have rules against insider trading, the United States has a reputation of having the strictest guidelines.

Illegal insider trading includes the misappropriation or stealing of information from any company employee and using this information to trade or sell any stock. The laws governing this illegal trade are so stringent that if an executive or any other company employee slips up and reveals any privileged information, even to just one individual, this privileged information must be announced to the public.

Despite all these rules and regulations in regard to insider trading, investors keep a close watch on which stocks a viable company or individuals inside the company trade, hoping that their investment decisions are an indication as to where the market is going.

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