What is Insider Trading?

Everyone wants to get access to unique information that would help us trade in the market. Insider trading is the term used to get access to secret information that could move stocks or a digital asset. 

It is worth noting that insider trading is illegal. In this guide, we will share with you what is insider trading in simple terms, why insider trading is illegal and more. 

What is Insider Trading?

Let’s start with insider trading definition. Insider trading is an activity that consists of trading stocks or cryptocurrencies based on non-public information. This information is crucial for the future of the stock considering it could move higher or lower. 

Insider information involves getting data that is not publicly available and use it to trade an asset. This has many consequences for the person involved in insider trading. There are different rules depending on the jurisdiction. However, most countries consider it an illegal activity. 

This could happen in traditional markets when we trade stocks or in the crypto space. In cryptocurrencies, insider trading is information related to crypto projects that could push the price of a cryptocurrency higher or lower. 

Insiders would use this valuable information to front-run the market and make larger gains. This activity is very common among Initial Coin Offering (ICO) owners and people with access to valuable information from different projects in the crypto market. 

How Does Insider Trading Work?

Insider trading works by getting access to highly valuable information that is not available to the general public. This puts the person with the information in a situation in which he could make a lot of money in an illegal way (in most countries, insider trading is illegal). 

The person that gets the insider information knows something the general public does not know. For example, they know if there would be a scandal in a publicly-traded stock or if a company has very bullish news for the market. 

As this person receives the information, it can open a short or long position on the market depending on the sentiment of the information. Of course, the market does not know what is going to happen. This privileged position puts the investor in a situation in which he could front-run the market. 

Once the information is made public, the insider trader closes its position after entering at the right moment. It is worth noting that in some circumstances, insider trading can be legal. In the United States, the U.S. Securities and Exchange Commission (SEC) is responsible for setting up the rules related to what is legal and illegal. 

What is Insider Information?

Insider information makes reference to information that was not made public and that would have a strong positive or negative impact on the stock of a company. This can happen in the cryptocurrency market as well with the price of a token. 

Investors have been protected by the SEC through regulations that make insider trading illegal. This helps the market behave in a fairer way and make sure everyone gets information that is publicly available. 

Insider information can be obtained legally, for example, the owner of a company shares data on future expansion plans that could be announced next week. If the person that received the information trades with this data, then it would be involved in insider trading. 

Why is Insider Trading Illegal?

One of the reasons why insider trading is illegal is the way in which the person with the nonpublic information purchases the stocks. The insider is committing fraud when he or she buys a digital asset or stock from another person. 

As the other party does not know about this data, he is making an informed decision based on the data available in the market. In this way, the person with insider data has a better position in terms of information.

Company owners and people with access to information from companies have to fill different SEC declarations if they purchase stocks. This is certainly important to inform the SEC about different investment decisions made based on possible insider information. Other regulatory agencies in different countries could regulate insider trading in different ways. 

Disclaimer: the information shared by AltSignals and its writers should not be considered financial advice. This is for educational purposes only. We are not responsible for any investment decision you make after reading this post. Never invest more than what you are able to lose. Always contact your professional. financial advisor.