Legal Terms 101: Everything You Need to Know About Insider Trading

When it comes to trading stocks, investments, and making money in the financial world, knowledge is power, and the more you know, the better and more informed your decisions will be and the more money you’ll be able to make.

As someone in this business, you’ll already understand the importance of tips; or insider knowledge that tells you what to buy and when.

However, while there’s advice that can help you make money, there are also insider tips that can get you in a lot of trouble, and may even leave you prosecuted and in jail.

Today, we’re going to explore everything you need to know about insider trading.

 

Public Knowledge is Perfectly Acceptable

Let’s say you hear two people talking in a coffee shop about the takeover of a business. You don’t know them, but it turns out they’re the owners of both companies and they say the deal is going to go ahead.

You go out and buy some stocks on your phone and you make a lot of money during the transaction. Is this an illegal tip-off?

Short answer; no. Because you heard publicly available information, you’re in the clear. The only way insider information is illegal is when it is handed over in private without being available to everyone.

For example, if the business owner came over to you and told you personally the deal was going down, but not to anybody else, then this would be illegal.

There are endless sources where you could get information publicly. If it’s in the newspaper, online on a website like lawmanaging, or in the news, then this is publicly available information.

Whether you overhear people in public, get told by a random stranger on the street, such as a taxi driver (although you probably shouldn’t trust random people with financial news), or you simply have a hunch to go on, you’re going to be fine.

 

You Can’t Obtain Information Illegally

This one should go without saying, but if you’re obtaining classified and private information illegally, without the people involved knowing, or through illegitimate means, then this kind of insider information means you’re breaking the law.

This could mean walking down the hallway of business and overhearing a private meeting that’s taking place and you hear something you shouldn’t.

Perhaps you’re more proactive and you’re hacking a business computer, reading someone’s emails, or bugging their phones.

Yes, these are all very illegal things to do. If you hear news of a random stranger, but they tell you to trust them because they’ve got a friend who’s involved in the business, but the stranger has an inside tip, then this is also illegal.

 

Summary

The bottom line is that when you’re looking at sources of information for insider trading, if the information is fairly available to everyone, known as public information, regardless of whether you heard it on the news, through a random person, or read it in the newspaper, you’re not doing anything wrong.

If, on the other hand, you obtained the information illegally, such as eavesdropping a conversation, hacking a computer, or going out of your way to collect information without anybody knowing, then you’re breaking the law.