Is all insider trading illegal?
C-suite executives and board members will always know non-public information about a company. These individuals aren’t prohibited from trading the company’s securities. But if they use that non-public information to profit, they’re committing illegal insider trading.
When insiders buy and sell stock, they must register their trades with the U.S. Securities and Exchange Commission (SEC). Additionally, many corporations impose blackout periods during which officers, directors, and key employees are prohibited from buying or selling shares. Usually, this comes ahead of earnings announcements.
The SEC monitors market activity for signs of illegal insider trading. For example, an unusually high trading volume of a company’s shares when no major news has been announced could trigger an SEC investigation. The SEC also monitors trading activity ahead of earnings season, acquisitions, and other major events.
But there are many gray areas about what constitutes illegal insider trading. For instance, if you receive a tip that involves material information that hasn’t been made public, you could be committing illegal insider trading if you trade based on that information. But you’d have to know the information was non-public.
Suppose you’re a shareholder in a company. You happen to overhear two of its executives in a panicked conversation because the company missed its sales target. So you decide to sell your shares. If you knew this information hadn’t yet been disclosed to investors, you’d be committing insider trading. But if you were unaware that this information hadn’t been made public, you wouldn’t be violating the law by selling your shares.
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