What is insider trading and why is it dangerous?

On Behalf of | Nov 11, 2022 | White Collar Crimes |

There are many white-collar crimes that net hefty penalties. Some may seem less worthy of these penalties than others.

For many workers, insider trading may initially seem like exactly that.

Defining insider trading

The U.S. Securities and Exchange Commission looks into insider trading and its impact. This is a heavily punishable offense which may not seem like such a bad thing at first. After all, insider trading simply means the use of “inside information” in order to make decisions in the stock market.

For example, say a person works for a large corporation that has been struggling financially lately. The company then announces to its employees that they will officially file for bankruptcy soon. However, they have not yet made this announcement to the general public. If a worker takes this information and uses it to sell their share in the company’s stocks before the general public knows about the bankruptcy, this is considered insider trading.

Looking at the negative impacts

So what about this is bad, exactly? In essence, it threatens the integrity of the market. If everyone used their inside information to make trading decisions in the stock market, it would become a mess of unfair advantages very quickly.

This sort of dishonest behavior puts off a lot of investors, too, which may cause them to withdraw their investments or be more cautious about investing. When investors are not investing, it threatens the stability of the entire stock market. Thus, the concern is that rampant and unchecked insider trading can lead to the eventual collapse of all stocks.

This is why the penalty for insider trading is so enormous. It can involve jail sentences of decades at a time, or fines that range from $500,000 to $1 million. Needless to say, it is not a crime that anyone wants to be convicted of.