What is the use of privileged information
First of all, it is important to note that there are two different meanings for insider trading. The first is illegal and refers to anyone who performs a trade on the stock market and makes a profit (or avoids a loss) based on information about that company that was not public information at the time. The second refers to a company official trading company stock, which is not illegal unless he is using inside information for profit.
Martha Stewart
Perhaps the most famous example of insider trading in recent history is Martha Stewart. What exactly did he do wrong? Well, one company he invested in, ImClone, had a cancer drug that had been rejected by the FDA, but that information was not available to the public at the time. The SEC believes her friend Sam Waksal told her about this rejection and recommended selling her ImClone shares immediately, which she did. By doing so, he avoided a big loss when the stock price finally fell. That’s a textbook case of insider trading, and he faced a prison sentence for it.
Why is it illegal
The Securities and Exchange Commission sets and enforces rules to make the stock market as fair as possible to trade. They believe that when someone deals with information that is not very well known, it is not fair to the general public. A publicly traded company should share its financial reports and any major news with the world so that shareholders and potential shareholders can make informed decisions. After all, the company is owned by the shareholders and they deserve to know what is going on with their company.
How to avoid problems
Probably the easiest way to get in trouble is if you work for a publicly traded company and are trying to trade your company’s stock for a profit based on information you heard at the office that has not yet been made public. Sharing or receiving this information from a friend at another company is just as bad. These situations are very tempting, and it is understandable. It is difficult to make a profit on a trade after the news has already hit the market. However, that is exactly why it is illegal, so you should try to avoid it. There are many gray areas in what is considered inside information, but if in doubt, don’t trade your company stock. There are thousands of other companies that you can invest in.
