What is Insider Trading?

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“Insider trading” is the act of trading stocks based on non-public (“inside”) information.  Insider trading is considered unfair to other traders not privileged with access to the same information.  It is therefore considered illegal in several countries, including the United States.  Financial transactions based on private information are commonplace in many types of markets, like real estate.  However, they differ from insider trading because a corporation that does not share information with its shareholders is violating its fiduciary duties of loyalty and care.

As a loosely-defined charge, the frequently-cited allegation of insider trading has many opponents.  Most financial firms believe that they are entitled to make profits based on the information that they acquire.  According to these opponents, it is their right to act upon information that they possess; and they should not face punishment for such actions.  But once they act upon this knowledge – without making it public to shareholders and other companies – they enter risky legal territory.  

Some defendants accused of committing insider trader claim that their actions are not victimizing anyone.  According to these individuals, their actions have not prevented a willing buyer and willing seller from entering into a contractual agreement to exchange goods.  Another general defense often asserted is that insider trading actually benefits the public by making the information available faster than it would be otherwise.

The United States Security Exchange Commission (SEC) is responsible for investigating and prosecuting claims of insider trading.  As one of the foremost countries to crack down on this type of corporate crime, the United States has put forth a large amount of legislation in recent years.  Unfortunately, there are still many types of insider trading that are too ambiguous to hold up in court.  First-time offenders of insider trading are only eligible to be sentenced for probation, rather than incarceration.  As of January 2014, the Federal Bureau of Investigation is still investigating the rampant use of insider trading throughout the futures market, suggesting that present laws still require modification and improvement.

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