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What Is Insider Trading?

May 25, 2016 | Written by Dan Margolis

You may have heard the term insider trading in the news, on TV, in movies or in some other avenue but not really know exactly what it means. The basic definition is when you buy or sell stocks in Ohio or around the country when you have inside information. Despite popular assumptions, insider trading is not always illegal, according to the U.S. Securities and Exchange Commission.

When insider trading is done illegally, it can hurt the integrity of the markets, which in turn could hurt the overall stock. Because of the impact it has on the market, the SEC puts the identification and prosecution of insider trading as a top priority.

If you were to choose to sell your stocks after you found out some confidential information that would increase or decrease the value of the securities, you would be conducting illegal insider trading. If you act on information from another person, such as a friend or family members, who has informed you of this proprietary information, you would also be conducting insider trading. It is not just if you were to sell the stocks; if you also had nonpublic information that showed the stocks were about to increase in value, then you would be conducting insider trading.

There are a few caveats to this insider training. A person must be aware that the information is privileged and nonpublic when buying or selling the securities. Additionally, if your actions were not influenced by the information, such as selling through a pre-existing plan, then you might be exempt from the illegal version of insider trading thanks to Rule 10b5-1. You are also legally allowed to trade stock in your own company, whether as an employee or director, as long as you have informed the SEC through filing certain forms.

Illegal insider trading typically includes some type of breach of confidence. Therefore, be cautious when conducting any business on the stock market using privileged information, and do not tip others off about the stock, either. This information is only intended to educate and should not be interpreted as legal advice.

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