Is trading stocks bad? Per se, it’s not. But the so-called act of “insider trading” is illegal and heavily punished in several countries. But what does insider trading actually mean? In this feature, we will try to answer your questions.
Let’s start off by finding out what it actually means to buy a company’s stock. This video by Khan Academy gives you a rough introduction.
Source: Khan Academy.
Insider trading is the trading of a public company’s stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the company. In various countries, insider trading based on inside information is illegal. This is because it is seen as unfair to other investors who do not have access to the information.
Trading by specific insiders, such as employees, is commonly permitted as long as it does not rely on material information not in the public domain. However most jurisdictions require such trading be reported so that these can be monitored.
So, how are insider deals made? This video by moneyweekvideos.com explains quite well, how insider deals are made and why they are hard to prove in court.
Sounds like a good deal, doesn’t it? Well, beware: Once you get caught, insider dealing brings you into prison easily.
In 2014, the European Union (EU) adopted legislation (Criminal Sanctions for Market Abuse Directive) that harmonises criminal sanctions for insider dealing. All EU Member States agreed to introduce maximum prison sentences of at least four years for serious cases of market manipulation and insider dealing, and at least two years for improper disclosure of insider information.
In 2009, a journalist in Nettavisen (Thomas Gulbrandsen) was sentenced to 4 months in prison for insider trading.
The longest prison sentence in a Norwegian trial where the main charge was insider trading, was for 8 years (2 of which suspended) when Alain Angelil was convicted in a district court on December 9, 2011.
Although insider trading in the UK has been illegal since 1980, it proved difficult to successfully prosecute individuals accused of insider trading. There were a number of notorious cases where individuals were able to escape prosecution. Instead the UK regulators relied on a series of fines to punish market abuses.
These fines were widely perceived as an ineffective deterrent (Cole, 2007), and there was a statement of intent by the UK regulator (the Financial Services Authority) to use its powers to enforce the legislation (specifically the “Financial Services and Markets Act 2000”). Between 2009–2012 the FSA secured 14 convictions in relation to insider dealing.