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Why is insider trading illegal?

When you start getting into trading, there are many rules both written and unspoken. It often feels overwhelming at first, and it is not unusual for a newcomer to make a mistake here and there. 

The important thing is understanding what is and is not legal. For example, insider trading is illegal. But what is it, and why is it illegal in the first place? 

Unfairness inherent in insider trading

The U.S. Securities and Exchange Commission discusses insider trading and why you cannot partake. First of all, it undermines trust in the market. Investors may feel like it is not worth their time if the market itself is not fair and free of bias. 

Next, it is not fair to other participants in the market. Insider trading happens when you use knowledge the average person does not have access to to make a trading decision. For example, if you work for a business that will soon file for bankruptcy, you cannot decide to sell your stocks in advance. The general populace does not yet know that the business’ stocks are in jeopardy, so you have an unfair advantage. 

Helping others get an unfair advantage

You also cannot provide others with an unfair edge. This means you cannot report inside information to your loved ones or relatives, allowing them to make more informed trade decisions. Even if you are not the one doing the buying or selling directly, it is still an unfair manipulation of market workings. 

You could face time in jail and a hefty fine if convicted of insider trading. Thus, you may want to contact a legal expert if you face accusations. 


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