What is insider trading?

What is insider trading?

The world of financial services is a blur of numbers, wealth and high stakes. Most of the millions of people that work in the industry behave ethically and are rewarded for succeeding through fair play rather than rule breaking. However, there is one murky area that provokes financial traders, lured by the temptation of wealth, into behaving fraudulently.

Insider trading is the practice of using non-public information to trade stocks or gain advantage because other people don’t have the same privileged access to the full story. You might do the trades yourself or tip someone off with private information.

It can be legal, such as for example, when people sell stocks in their own companies. However, otherwise, it is illegal. It is punished heavily because it can breed corruption and shatter confidence in financial markets.

America’s beloved television star and businesswoman Martha Stewart was the subject of one of the most unexpected and famous cases of insider trading. Her friend Sam Waksal owned biotech ImClone and had just heard news from the Food and Drug Administration had not approved their main product.

He ordered the sale of his $5 million stake in the business. Through a complex chain of whispers, Stewart’s broker tipped her off that Sam Waksal was selling his shares, though not the reason why. She sold $228,000 worth of stock before the information went public and the share price fell.

She was sentenced to five months of prison time for the statements she made to cover up the questions around the trade. Her fine came to a total of $195,000, four times what she would have otherwise lost plus interest. However, the charge of insider trading was dropped. If she had known that the shares were being sold off because of the FDA decision, it could have been an even more severe prosecution and sentence.

The US Securities and Exchange Commission reports that there are almost 500 civil enforcement actions each year against people and organisations that break laws around securities and trading. These are designed to help keep the playing field level and ensure that people have confidence in financial services. Insider trading is one of the highest profile and notorious ways that people can try to game the system.

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