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What is Insider Trading?

Insider trading occurs when individuals with access to “material nonpublic information” buy or sell stock in the company. The practice can be legal or illegal, depending on how and when trades happen. 

Insider trading, explained

Insider trading involves trading (usually stocks) by someone with access to material nonpublic information. (Material information is any information that could substantially impact financial markets and/or trading decisions. Nonpublic information includes all privileged information not currently publicly available.) 

Often, illegal insider trading involves the use of unreleased company information, such as knowing about a merger before the official announcement. However, economic data, like monthly inflation figures, can also influence markets and may fall subject to insider trading laws. 

Illegal vs. legal insider trading

The SEC defines illegal insider trading as buying or selling securities “on the basis of material, nonpublic information about the security.” That extends to people “in the know” and outsiders who trade based on tips from insiders. 

By contrast, legal insider trading occurs when influential officials (like CEOs) disclose investment transactions through proper channels. They must also disclose their transactions to the public (such as on a company website.) 

Why insider trading is bad

Insider trading became illegal after Congress passed the Securities Exchange Act of 1934, although the Supreme Court had convicted a corporate director of fraud for the practice as early as 1909. In addition to making insider trading formally illegal, it also required company officers, directors and major shareholders to report their stakes and transactions in a timely manner. 

Insider trading is bad because it offers insiders unfair advantages, including making timelier trades – and larger profits – compared to fellow investors. 

Additionally, insider trading erodes the integrity of financial markets. When investors believe markets are “rigged” for the connected, they’re less likely to invest. Widespread insider trading can also negatively impact market liquidity and drive up trading costs. 

A few famous cases

Research suggests that insider trading is fairly common. Unfortunately, identifying insider trading requires a lot of conjecture. As such, accusations can be controversial and disputed – especially in high-profile cases. 

One famous instance is the case of Martha Stewart. She was convicted in 2004 after selling a biopharmaceutical stock to prevent losses based on an unreleased report that the FDA had rejected its latest cancer treatment. Unfortunately, since her insider tip came from her stockbroker, she spent five months in prison. 

Jeffrey Skilling, former CFO of Enron, is another famous figure in insider trading. He was convicted after duping investors about the firm’s profitability and dumping stock when it came time to cash out. 

What insider trading means for you

If you get rich on research, hard work and getting lucky, that makes you fortunate. But if you’re a company insider using your knowledge, or an outsider trading on insider tips, you might be engaging in insider trading. And if you’re caught, you could face hefty fines and a decade or more in prison. 

Fortunately, with Q.ai, you don’t have to worry about insider trading, fines or prison time. Our AI-backed Investment Kits quickly, easily and legally diversify your portfolio. And you can rest assured that any money your money makes is clean – guaranteed.

Disclosures

Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai's investment advisory services.

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