10 May What is Insider trading and how to avoid it?
Insider trading is an advantageous form of trading. In other words, it’s the buying and selling of stocks by a person that has access to information that is not public. This information can be used to influence trading decisions as well as manipulate prices. Though there is a certain restriction in some countries, the other places can be ambiguous. Depending upon the country you live in, the laws can change. However, in the US, the recent law passed in 2012 restricts not only Congress but also puts ethical obligations on Vice-president and the President on the sharing of the information.
What is Insider trading?
The legal definition of Insider trading is broad and its flexibility is what will help Congress to expand it. To put it in layman’s terms, it’s the buying and selling of Company stocks by an individual who has access to any material information that non-public. This information can highly affect the value of stocks in the market. It gives the trader an advantage against other traders.
Why is it illegal?
Nobody is immune to the Insider trading laws in the US which prohibits insider trading by the Congress, executive-level employees as well as outs restriction on the president also. The Stock act was passed by the Obama administration on April 4, 2012, to combat Insider trading. It’s considered unethical and unfair to other traders as the they have access to the non-public information that will run ahead in the market. However, the law applies to everyone, the way it applies to the Congress differs. This is an unintentional legal loop where all other laws have created a whirlpool. The flexibility of the STOCK law will surely help Congress to expand it in the coming future. Though there can be a variation in other countries where the regulations can be strict and even in some places it can be ambiguous.
How to avoid it?
You need to be careful when dealing with securities. Don’t indulge in behavior that may provoke the other person to reveal confidential information while you are conducting a trade or if you are unsure whether the information is public or not, contact the authorities. Check your sources of information before you conduct a trade. You can be a holder of confidential information, make sure not to accidentally or intentionally get it out. Trade under the legal boundaries and educate your team to do the same. This will keep you in the legal circle and help you grow with trading.
Insider trading laws in the US are very strict. Though the initial law was passed in 1934, the recent one came in 2012. There is a however different application so the law, but as far as avoiding is concerned, one should be careful not to accidentally indulge in it. This can be only be done when the traders are aware of not just the law but also is careful what sort of information is he receiving.