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Why is insider trading illegal?

| Apr 5, 2021 | Firm News

Insider trading is likely a term you have heard of before, especially if you have taken part in the stock market or other forms of trade. But do you know what it is? Do you know exactly why insider trading is an illegal act punishable by law?

There are many mixed opinions and reports out there about insider trading. But for many, the potential damage it causes tends to outweigh any benefits one might reap on an individual level.

Personal risks of insider trading

The U.S. Securities and Exchange Commission looks at the risks associated with insider trading. Of course, personal risk tends to stem from the fact that you could face serious punishment if caught and convicted. In fact, insider trading boasts a potential jail sentence of up to 20 years maximum. On top of that, the fines you may face are often crushing. Individuals alone may face a maximum of $5 million in fines.

The risks that the market faces

But there are bigger risks at hand, too. One of the main reasons that insider trading is illegal is due to the harm it can inflict on the market. Investors only buy and sell stocks because they trust that the market is fair. But what is insider trading? It is the trade of information the public does not have access to, which a person then uses to make their trading decisions. Needless to say, this is a practice that allows one person to benefit unfairly over all others. If investors feel like this is happening too often, they will not want to buy or sell. In essence, it can put the entire market at risk.

Thus, you want to avoid committing the crime of insider trading. The repercussions are not light for anyone.