What to Learn From Legal Insider Trading

 

According to many people, insider trading is illegal. Well, insider trading can be both legal and illegal; it all depends on the scenario. Some of the prominent firms that have caught the media’s attention because of insider training include Martha Stewart, a prominent businesswoman, and Rajat Gupta, a director at Goldman Sachs.

Illegal insider trading occurs when someone has access to some confidential information and they use it to their advantage to make illegal profits. In this case, we’ve only looked into the illegal part of insider trading, which is classified as security fraud.

According to the Securities Exchange Act established in 1934, if someone acquires or sells securities while they possess information that is yet to be disclosed to the public, they shall be liable for engaging in illegal insider trading. 

Some people assume that only corporate individuals such as directors, managers, or employees are held liable when illegal insider trading takes place. In reality, it can be anyone who has any information yet to be availed to the public eye. For instance, you may overhear some news while in a public place. When you use such information to make some profits, you might end up on the wrong side of the law.

The confidential information should not be shared among friends to make profits when it comes to stock trading. Individuals like Gupta got jailed for two years because of illegal insider trading. The main issue is that such pieces of information usually affect the prices of the stocks after being availed to the public. It is usually hard to prove whether the information is “valid” or not. As a result, it is not easy to detect that illegal insider trading is taking place.

The only instance when insider trading is legal is when the “corporate insiders” are trading by themselves. Many people fall into this category, and they include beneficial owners, managers, employees, and other people affiliated with the organization. Such individuals are allowed to engage in the sale and purchase of stocks in the firm as long as they don’t possess any confidential information.

When the corporate insiders engage in the sale and purchase of stocks, everything must be filed with the relevant authorities within two business days. Some trades aren’t supposed to possess any material information. Some people believe that the trades usually reflect information that is not material in nature; hence, it cannot be released since it is not material enough. Some studies have been conducted, and it is evident insider trades can help to predict the future of the stock earnings and returns.

You may ask yourself, are the legal insider trades as informative? When the insiders purchase the stocks, the prices usually rise compared to when the stocks are sold. The main question that comes about now is whether insider trading should come to an end. The main issue is that there are individuals who see “insider trading” as unfair. According to professionals well versed with matters pertaining to the finance sector, illegal insider trading will decrease the market value of a company while increasing the cost of capital.

Regardless of whether Facebook insider trading is taking place, you’re bound to gain significantly from the low cost of capital in the firm as an investor. The shareholders and SEC should monitor everything when it comes to legal insider trading. If an insider trade contains material information, there is a high likelihood the shareholders will incur a huge loss.

According to some researchers, legal insider trading is mainly beneficial to the shareholders, considering the firm will gain more value, and the cost of capital will be low. If there are any restrictions on insider trading, the firm’s market value will be affected significantly.

When illegal insider trading takes place, the shareholders are among the major casualties considering they’ll be affected adversely. The main advantage of legal insider trading is that important information can be available to analysts and investors which cannot be accessed through financial news. As a result, the investors can develop suitable trading strategies while making a follow-up on the transactions being conducted by the insiders.

As an investor, you might assume that insider trading is not as beneficial. Well, insider trading is beneficial, and you will gain from the low cost of capital. Ensure you’ve come up with suitable investment strategies and you’ll gain significantly.

 

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