Insider trading is a term many people have a passing familiarity with. But what exactly is it?
More importantly, why are the penalties associated with insider trading so high?
Defining insider trading
The U.S. Securities and Exchange Commission takes a look at insider trading and why it counts as a crime.
First of all: what is insider trading? This happens in any situation where a person uses their “insider information” to get a leg up over everyone else in the stock market.
For example, say a company announces to its employees that it will soon file for bankruptcy, but it has yet to announce this to the wider public. If an employee then sells their share of stocks in the company knowing that it will soon go bankrupt, this is insider trading.
Insider trading also counts when a person on the inside gives or sells their information to others so they can make unfair decisions.
A look at the penalties
The penalties can differ depending on the various unique circumstances of each case but typically include a fine and a jail sentence.
At its maximum, a person may get charged up to $5 million and spend up to twenty years in prison, which is no small number.
So why are the penalties that stiff? In essence, the entire stock market runs on the trust of the investors. If they feel people make unfair gains using inside information, they are less likely to invest. It puts the entire stock market at risk, which is why it is so important to deter people from engaging in this act.