The Dangers of Insider Trading

Richard Parker  |

Chances are you’ve heard plenty of talk about insider trading in the news as a result of numerous high profile criminal cases. It’s often a complicated business that can result is serious consequences. While it’s unlikely for you to stumble into an accidental insider trade, it’s important to know what it is, how it works, and how to avoid it. If you’ve recently begun trading stocks and investing in your financial portfolio, here are a few things to know about insider trading.

What Is Insider Trading?

Naturally, insider trading surrounds insiders. Insiders are individuals who have information on companies or investments. Sounds pretty self-explanatory, right? Having access to that information isn’t illegal in and of itself. In fact, it’s a fairly fundamental part of modern business transactions. It starts getting into murkier waters when financial trading is involved. Essentially, the illegality of insider trading stems from how an individual makes use of their knowledge of those companies and investments.

When an insider takes the company or investment knowledge they have and uses it to make a strategic stock buy, that is an insider trade. By abusing that privileged information, an insider is actively undermining the faith the public has in the market and also causes harm to investors who don’t have the same level of information access at the same time. Whether it’s swing trading strategies or day trading, there’s no doubt that you’d be less likely to purchase a given stock if you knew it was subject to insider influence. It’s almost like playing a board game against someone who already knows every move to make to ensure that they win.

Minimizing Liability

There have been numerous debates over whether an individual is culpable in an insider trading case based on possession of knowledge or use of that knowledge. The United States Supreme Court has worked to clarify the breadth of the laws yet there is still much division on what renders an individual guilty of illegal trades. Luckily, when it comes to mitigating the risk of insider trading, the answer is fairly simple: Avoid engaging in any company-adjacent trades that involve your workplace in any way.

While this may seem outwardly simple, it’s also why the question of possession of knowledge is being discussed so fervently. While it’s much easier to prosecute the use of insider knowledge, crimes involving possession of knowledge as well as accessory crimes are still punishable by law. For instance, if you become aware of an upcoming company windfall that would greatly improve your stock options and you inform a colleague who uses the information to make a trade, you become what’s known as a tipper. Insider tipping is also a very serious offence and frequently requires legal representation to combat.

Retaining Counsel

The repercussions for insider trading accurately reflect the severity of the crime. After all, an insider is abusing their position and knowledge to create an unfair advantage for their own financial gain. Insider traders frequently face hefty fines, difficult trials, and often federal prison sentences. It’s one of the largest nets of white collar crime convictions and even celebrities like Martha Stewart have faced jail sentences as a result.

If you’re in a position where you’ve conducted an insider trade or you may have inadvertently tipped someone off to insider knowledge, legal counsel is absolutely necessary. Many lawyers offer free consultations to assess the merits of your case and help you make a decision on whether or not to proceed. Thankfully, there are numerous New Jersey attorneys who are experienced in the ins and outs of insider trading cases. The sooner you retain legal counsel, the better.

Better Safe Than Sorry

When it comes to insider trading, if you have any doubts about the validity or legality of a trade you’re about to conduct, it’s better to abstain than to proceed. It’s also important to be proactive in reporting suspected insider trading. It helps you to mitigate liability and avoid any legal culpability should a conviction arise. If you’re interested in conducting trades to strengthen your financial portfolio, remember to always trade wisely.

DISCLOSURE: N/A


The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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