Sure it looks fun in the movies and it is basically what started this whole Martha Stewart mess, but how many of us understand what insider trading is?
Well, there are a good deal of gray areas when it comes to the insider trading laws, much like how traffic laws are open to interpretation but can still land you in jail based on how they are interpreted.
Insider trading laws were enacted in a five-year period following the 1929 crash to combat some common abuses of the era.
Basically, it is illegal for you buy or sell shares of a company based on information that you receive from an officer or key employee of that company.
If this individual tells you, or in some other way, provides information to you that they believe will, or is commonly known to, effect share price and you then go and buy or sell shares in that company, you have then committed a crime.
Here’s the kicker. If the person telling you this information is not an employee of that company nor discloses to you that they heard this information from an employee of the company, you can buy and sell all that you want to with this information, completely legally.
If you are walking down the street and find a memo that says Microsoft is going to stop selling software and develop a new line of oven mitts, you can legally act on that information. More so, if you break into Bill Gates’s house and see this memo on his desk, you can be prosecuted for breaking into his house, but you can buy, buy, buy and sell, sell, sell, fully legally with the information that you saw while you were illegally in his home.
But, if you hear it from a Microsoft employee and you act on it before it becomes public knowledge, you can end up in jail for insider trading.
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