Mike Swanson's picture

Why Is Insider Trading Illegal - Mike Swanson (WallStreetWindow)

I know you might be wondering why is insider trading illegal? It wasn't always illegal. First though you have to realize there is legal insider trading. This is when a CEO or a company insider buys or sells stock in their own company. The SEC requires that they report these trading so that you can know when they are going on.

Illegal insider trading is when someone buy or sells a stock, because they learned about information not known to the public. They have been privy to nonpublic information and are taking advantage of it. Even a tip about upcoming earnings passed along by a company officer is illegal to act on.

It does seem to happen though, because you can see stocks that have sudden surges in volume and then come out with news. It looks as if people knew about the information and acted on it. If they did they broke the law.

But why? Why is this illegal? Why can't you but stock picks based on insider info?

Back after the 1929 stock market crash there were cries that the stock market was rigged and that insiders made money while everyone else suffered. There were active "pools" of traders that included big powerful bank insiders that would run stocks up - basically manipulate there share price - and then come out with news that excited the public. They would sell into their manipulations and then the stock would drop and the public would lose.

The SEC adopted insider trading laws with the goal of making the stock market more fair. They claim that without insider trading laws the stock market would not be accurate and be like a big fraud game for the regular investor.

The courts say that insider trading is illegal, because the officers of the company have a duty the shareholders and the company to not take advantage of them with inside information. Insider trading may make it so CEO's and management have incentives to play sneaky stock games instead of just try to run their company the best they can.

In the end their is a fear that if the stock market is not seen as a level playing field then thousands of investors will leave it or never enter it all. So insider trading laws are designed to the benefit of all who invest in the stock market and the SEC is the guardian angel that protects investors and keeps the market pure.

For more on the stock market and investment strategies I use to make money check out my free stock market beginners guide.


Sign Up Below to My Free Weekly Newsletter

Hello. My name is Mike Swanson. I’m the best-selling author of the book Strategic Stock Trading. In a former life I used to run a hedge fund from 2003 to 2006 that generated a return of over 78% during that time frame. In fact it was ranked in the top 35 out of 5,000 hedge funds in 2005.

After I retired from the hedge fund world I setup this website and blog. If you sign up for my free weekly email list below I’ll send you an update on average about once a week on my views of the current stock market trends and share with you actionable investment ideas.

Now I cannot promise you that every stock I find will go up in value. I can’t promise you endless 100% returns as others claim they do and as all the disclaimers say past performance does not necessarily predict future performance and you can lose all of your money in the stock market.

This is reality.

What I can promise you is my dedication to doing the best I can for you.

You see the key to making money over the long-run in the stock market is to manage your risk. Once you sign up to my newsletter I’ll send you a series of educational videos and writings showing you how I use stop-loss orders to cut any potential losses and how I use my two fold formula system that combines fundamental and technical analysis to pick stocks. My goal is to risk one dollar to try to make at least three dollars in my trades by looking for stocks that are priced cheaply on a valuation basis, have high earnings growth, and have excellent chart patterns.

So join my list below and let me help guide you on your journey in the stock market.