What is Insider trading and why is it illegal? | The Action
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What is Insider trading and why is it illegal?


What is Insider trading and why is it illegal?

Insider trading allows the Insider to have an advantage at his trading. This is simple words is the selling and buying of the company stocks by any person who has access to non-public information about the stocks? What is non-public information? This is any information that has the power to influence the value of company stocks and has not been made public. This information can be acquired by anyway. However, some laws prohibit and combat Insider trading, there is also an issue of Corporate trading where employees of the company use the information at their disposal which is completely legal.

What Insider

What is Insider trading?

The legal definition of what constitutes Insider trading and not is broad and with the passing of the Stock Act in 2012, the law is likely to be expanded by the congress. However, to define Insider trading in the simplest of terms is that it is the buying and selling of company stocks by any person that has any sort of access to a piece of information that is yet to make public. This information can help them in manipulating the Stock values and keeps them one step ahead of the market. It gives the investor a unique advantage.

Why is it illegal?

Corporate Insider trading is justified somewhere to some extent, but as for the US is concerned, it’s prohibited. The Stock Acct makes it illegal. It’s considered unfair to the other traders as the Insider has access to information that nobody has hence given them an advantage in the market. Though there are strict rules in the US, there can be leniency in countries like Japan. It’s until recently that rigid regulations were passed by the Obama Administration and the Insider trading was brought under the law.

What is the Stock Act?

The Stop Trading on Congressional Knowledge (STOCK) Act was passed on April 4, 2012. It puts some serious restrictions on Congress, executive employees for use of any non-public information to make personal profits. This applies to President and Vice-president also who are required to follow some ethical code also. The act was specifically brought in to combat Insider trading. However, as the Act is yet to take its full force, it’s likely to be extended as the definition is pretty broad and flexible which allows the congress to expand it at their will.



Insider trading has remained a part of business, but as the trading revolutionized, so did the need to regulate it. The initial law to prohibit Insider trading was passed in 1934, though there were occasions where the need arose, the radical reform law was passed into law by the Obama Administration in 2012. Apart from the prohibition, it also puts ethical obligations on the President as well as the Vice president. The Stock Act is likely to be expanded as the legal definition of Insider trading allows the flexibility and broadness to the law to be applied in a broader sense.

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