Types Of Insider Trading

There are two different types of insider trading, legal and illegal. Illegal insider trading works outside of the specific insider trading rules set forth by the SEC and can come with a large penalty.

Whenever you are given a specific amount of information from a company that is not known to the general public and trade off of that news you are acting illegally. So for instance if you sell a stock because you know a big company project is about to be canceled and the company will be hit hard, you are acting on illegal insider information.

The penalty for insider trading can vary from case to case. In one of the most famous cases Martha Stewart was fined $195,000 and required to do some jail time.

Don’t think that you will be off the hook if you are not the one who placed the trade. Anyone who gives insider information to another person may also be found liable. In Stewart’s case her broker was also fined and received a large fine.

So, if you are approached by a person with insider information the best thing to do is to walk away and report it to the SEC.

For more on insider trading penalty visit http://www.law.uc.edu/CCL/34Act/sec21A.html

Legal Trading

This does not mean that the people on the inside cannot buy or sell their own stock; they just have to do it with in the specific insider trading rules created by the SEC. In addition all insiders have to report buying or selling of that company to the SEC with in 2 business days.

This insider trading information can be viewed publically on sites like Yahoo Finance, and MSN money and can be used as a stock market indicator, which allows the common investor to see what the people on the inside believe will happen. It has shown to have some truth to it.

In fact a study at the University of Michigan reveled that when a stock was being heavily bought by insiders it tended to outperform the market by 8.9% over the next 12 months. When it was being heavily sold it tended to underperform the market by an average of 5.4%.

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