Buying and selling shares of stock is common task for companies, shareholders and investors. Buying and selling stock can be very lucrative and a way to make profitable investments. However, there is a process that must be followed when trading stock. The failure to do so could but an individual or corporation at risk of criminal penalties stemming from fraud. Those accused of insider trading could endure harsh penalties if convicted, thus it is important to understand when this is considered illegal and what it exactly entails.
What is considered insider trading? First, let's define and insider. This is a person that possesses at least one of two things. They either have access to valuable non-public information regarding the corporation, or they currently have ownership of stock that is 10 percent or more of the firm's equity. As soon as one hears the term insider trading, he or she is under the impression that this act is illegal. However, there are two methods by which insider trading could occur, and only one of them is considered to be illegal.
Let's begin with the legally permitted insider trading. An insider is allowed to buy and sell shares of the corporation or any subsidiaries that employ him or her. However, when these transactions occur, they must be properly registered with the Securities and Exchange Commission or SEC and completed with an advance filing.
On the other hand, the illegal insider trading includes the use of undisclosed material information for your own profit. This can be done by anyone, not just company executives. This could be an employee, a family member, relative, friend or just an average person walking on the street. If a person is using information that is not publicly known for his or her own profit, this is considered illegal insider trading.
Those accused of insider trading could face serious criminal charges for fraud and could endure harsh penalties such as fines and prison time. Thus, it is imperative to understand what information these charges are based on, what evidence has been collected against you and what defense options you might have. This could help a defendant develop a strong defense strategy that could reduce or even dismiss the charges against them.
Source: Investopedia.com, "What exactly is insider trading?" Feb. 29, 2016