People involved with big business in any way have likely heard of the term insider trading before. What is less well-known are the penalties associated with it.
Just why is insider trading treated in such a serious way? What exactly does it entail, and what problems does it pose?
An overview of stock markets
The U.S. Securities and Exchange Commission talks about insider trading as a problem that could theoretically impact the security of the entire stock market system.
In essence, the stock market functions on trust. Investors trust that people are engaging in fair competition within the market. Insider trading effectively ruins this balance of trust, as it allows certain people to participate in the sale and purchase of stocks with an unfair advantage.
What insider trading is
After all, insider trading involves people making stock decisions based on information the public does not have access to. For example, an employee will know before the public that the large company they work for intends to announce bankruptcy. If they choose to sell their stocks before this announcement, it is using an unfair advantage to game the system.
If investors lose their trust in the market, they are less likely to invest. This can easily lead to a collapse of the entire system if no one wants to engage or spend money.
This is why penalties for insider trading are so enormous. Many people convicted of insider trading face time in jail, potentially for a decade or more. They may also face fines of $500,000 or more, depending on the crime they faced conviction for.