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All About Insider Trading

Aug 17, 2007
Insider trading is the trading of a company's shares by people who work for the company, such as senior level executives, directors and those who own more than 10% of the total shares. Insider trading is illegal since the trading is based on some privileged information that the insider has access to, but is not known to the public at large. The act of misappropriating some privileged information, or violating duty and trading or relaying information illegally is illegal in the United States. The office bearer has made a contract to serve the shareholders and to protect the interest of the shareholders so the office bearer violates their duties if the office bearer trades based on company owned privileged information for their own gain. The United States has had laws against insider trading going as far back as 1909. At this time the law declared if a company's director bought his company's shares because he knew its value was about to increase suddenly, it was fraud.

Not just senior level executives are capable of insider trading. Anyone in the company with privileged information is capable of insider trading. For instance, if an employee of company 1 learnt about the takeover of company 2 by company 1 and buys the shares of company 2 it is illegal insider trading, since that employee is violating the interests of the shareholders of company 1. According to US federal laws, companies have to specify a certain period when their staff can safely trade stocks without being accused of illegal insider trading.

Penalties for Insider Trading
Penalties for insider trading include a fee of three times the profit incurred or the loss caused to the company by insider trading. The insider may be banned from being a company executive or removed from the board of directors. The culprit may even have to face a jail term. The SEC (Stock Exchange Commission) offers rewards as bounty to those who help apprehend insiders who practice illegal insider trading.

Laws must be enforced to protect the investors, to ensure a fair, efficient market that is transparent and ethical, and to reduce systemic risk. Laws are needed to control insider trading, trading ahead of the shareholders, and to avoid misuse of client's assets. These principles are the core principles issued by the International Organization of Securities Commissions and more than 85% of the world's security and comodities regulators have agreed to follow these principles.

Legal Insider Trading
Insider trading can be legal when a company's insider does not break any law and trades his shares in a normal mannerm reporting it to the SEC. However, some groups oppose the notion of any insider trading being illegal. They argue that trading by insiders is allowed in real estate sectors so it should be legalized in other sectors as well. They don't think the securities market should be treated any differently. They believe insider trading makes the stock market more efficient.

Effects Of Insider Trading On Shareholders
When insider trading occurs repeatedly, the common shareholders end up losing money, whereas the insider pockets a sizeable profit cheating the company and the trust the shareholders have placed in the corporation. Despite the laws and the penalities, insider trading continues and most often the perpetrators of this illegal act are left unapprehended due to lack of proper evidence. This has a negative effect on shareholders in general.
About the Author
David Gass is President of Business Credit Services, Inc. His company publishes afree weekly e-newsletter on Small Business Consulting at their web site http://www.smallbusinessconsulting.com
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