What Is Insider Trading and What Are Its Benefits?

by Andrew McGuinness     Jul 16, 2019

If you have heard of insider trading before, it is likely that you associate this term with its negative connotations. However, insider trading doesn’t have to be negative. Many people have heard of insider trading but don’t know exactly what it is or what it’s all about. For this reason, they allow the negativity associated with insider trading cloud their judgement and decide for them. Here is an overview of what insider trading is and what it involves as well as some significant facts concerning this trading strategy.

1. What is insider trading?

Insider trading is a term with a definition easily determined through context. It is basically trading that is carried out by someone with more access to information concerning the trade than the public. If you go about insider trading using classified information to your advantage, you are employing illegal uses of insider trading. If you are to clue anyone in on this classified information that has not yet reached the public, you are also using insider trading illegally.

2. Legally going about insider trading

Insider trading is usually associated with illegal methods of trading. However, legal insider trading is also possible. The difference between legal and illegal insider trading is usually a matter of when the insider makes their trade. If the information used with insider trading is not yet available to the public, it is seen as illegal. If, on the other hand, the information used in order to take advantage of a trade has been released to the public, it is fair game and legal to go about insider trading.

Particularly suspicious is when traders suddenly decide to invest in their own companies. This tends to be a sure sign of illegal insider trading. There are countless reasons why a trader will begin to pull their investments, but when it comes to starting an investment it all boils down to one reason: potential for growth.

If someone has been working at a company and out of nowhere chooses to invest in this company, the odds are pretty considerable that insider information is what led to this decision. In order to avoid this illegal trading, insiders are not allowed to purchase or sell company stock within the span of six months. This pushes insiders to make more decisions based on where they see the company going in a more long-term basis.

3. Martha Stewart

Martha Stewart invested in a biopharmaceutical company called ImClone, purchasing thousands of shares. Apparently, however, this wasn’t such a wise decision because the company was still up in the air due to the fact it had not yet gained FDA approval.

Unfortunately, FDA approval never came for ImClone, and this caused its shares to drastically drop. Before this occurred, however, Stewart received a tip from insider Peter Bacanovic. Bacanovic was a broker who relayed the information to Stewart upon the CEO of ImClone selling all shares he had with the company. Stewart was able to avoid a loss of nearly $50,000 because of this.

4. Amazon

Very recently, during fall 2017, an insider was found carrying out illegal insider trading within Amazon. Brett Kennedy was a financial analyst and the culprit of the crime, giving an old university colleague information concerning Amazon’s quarter earnings in 2015 before they were made known to the public. The colleague, Maziar Rezakhani, paid $10,000 for Kennedy’s tip and ended up turning that tip into a whopping $115,000 from trades with Amazon.

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