If you’re like most people, the term “insider trading” probably conjures up images of wealthy white-collar criminals wheeling and dealing in back rooms. But the reality is that insider trading is much more common and less nefarious than you might think. The goal of any trader is to make as much money as possible when using the tradingview platform. Therefore, it is not completely far fetched that some traders will do almost anything to make a profit.
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What is Insider Trading?
Investing in stocks or other assets based on knowledge that is not available to the general public is considered “insider trading.” It is a serious violation of trust and a clear breach of fiduciary obligation. In such a scenario, the trader exploits confidential information to make a profit. This goes against important rules that are supposed to keep the market fair for everyone.
Although insider trading has been at the center of several high-profile incidents over the years, many investors still lack a firm grasp of the concept. In market terms, “material information” is any fact that could affect the price of a security.
Access to this information offers the investor a competitive advantage when buying or selling stocks. Because there aren’t many others who have the same edge as you, it gives you an unfair advantage.
History of Insider trading
One of the earliest documented cases dates back to 1789, when Alexander Hamilton put William Duer in charge of the U.S. Treasury. Six months later, Duer resigned after the revelation that he had been using confidential information to trade stocks and bonds. While Duer is often credited as the first person to engage in insider trading, there are records of similar activities dating back to the 1500s.
Insider trading wasn’t always seen negatively. In the early 20th century, it wasn’t illegal and wasn’t even frowned upon.
Following the 1929 stock market collapse and the Great Depression, trading methods came under increased scrutiny. Many rulings and regulations have reduced the practice of insider trading and subjected its practitioners to harsh fines. There wasn’t a governing organization in charge of formulating fundamental laws until 1934 when the SEC was established, and the Securities Exchange Act was passed.
The Act neither outright prohibited insider trading nor defined it, but the SEC was able to make many specific actions illegal via a set of regulations.
7 Insider Trading Secrets You Probably Didn’t Know
Here are 7 of the hidden secrets that might help you spot insider trading’s hidden gems.
1.Anyone can be an insider trader
You don’t have to be a corporate bigwig or Wall Street financier to engage in insider trading. Although Corporate leaders and government officials are commonly prosecuted, insider trading may occur even without a fiduciary obligation. Anyone who gives out insider knowledge to another individual can be prosecuted and found guilty. Crime often comes to light in these situations due to previous crimes.
2.You don’t have to profit from insider trading to be guilty of the crime
Many believe you can only be charged with insider trading if you profit from the transaction. But that’s not true. The SEC has the authority to charge those who receive information and those who provide it with insider trading.
Even if you lose money on the trade, you can still be prosecuted if prosecutors prove that you knew the information was non-public and acted on it anyway.
3.Not all insider trading is illegal
The Securities and Exchange Commission (SEC) considers various elements before charging someone with insider trading. The SEC must demonstrate, among other things, that the defendant had a fiduciary obligation to the corporation and that they intended to profit personally by purchasing or disposing of shares based on insider knowledge. As a result, investors can take advantage of this.
4.Invest When There Are Group Trades
The insider trades that get the most attention are when well-known CEOs buy many shares at once, like $1 million or more. Even though these big purchases are great and can signify that something interesting is happening at the organization, it’s a good idea to keep an eye out for “cluster” deals.
So, for example, the General Counsel, 3 Directors, and the vice chairman of marketing may all decide around the same time to buy smaller shares. Cluster buying is uncommon compared with the CEO’s major purchase and sends a strong signal.
5.Buy If First-time Insiders Are Buying
It is very uncommon for insiders who have not purchased shares in a very long time, if ever, to decide to do so. The fact that an insider is buying shares now when they have never done so sends a powerful signal.
6.The most successful traders use multiple sources of information
In the world of trading, information is everything. Traders with access to the most up-to-date and accurate information are usually the most successful. While it’s important to have access to public information, it’s also important to use non-public information to make informed trades as long as it is legal. The most successful traders use a variety of sources to get the information they need. They might read trade publications, follow financial news sources, and even talk to other traders. By gathering information from multiple sources, they can make more informed decisions and maximize their chances of success.
7.There are both civil and criminal penalties for violators
Penalties for insider trading can include fines and jail time. The result may be either, but it often comprises both. The severity of the situation determines the specific punishment. Illegal insider trading carries a possible sentence of up to 20 years and a fine of up to $25 million.
The SEC may also take action to bar persons who participate in illegal trading from holding board positions with publicly listed corporations.