One would think that insider trades shouldn’t be something to worry about, right? Especially, when it is heavily regulated by the SEC. This is an easy YES, but with a huge amount of information being disclosed and filed, something may fall through the cracks unknowingly.
To have a good understanding of insider trading, we need to have a clear knowledge of it and seven things to expect if you are a retired investor.
There Are Two Insider Trading Categories
In the trading world, there are actually two types of insider trading. These can be recognized as legal or illegal. The difference lies with the timing that a trade is made by an insider.
Insider Trading That Is Legal
Legal trading occurs when public information is used by a company insider to make a purchase of stock or to sell them. This public information eliminates any advantage over others for financial gain. Plus, all insiders are federally required to disclose all transactions for SEC inspection.
Insider Trading That Is Illegal
Illegal trading happens as an investor is provided with information regarding a stock that may provide an unfair advantage over those who do not have the same information. Also, if the same nonpublic information is shared to continue the advantage, then that investor is prone to be convicted of the crime.
- Watchdog: the Securities and Exchange Commission
When it comes to insider trading, there will always be something to worry about. This is why the SEC continuously updates the rules involved in order to maintain corporate compliance and ensuring brokers are held accountable in their dealings.
- Disgorgement
It is always bad business to shortchange a company for personal gain. This is why the SEC makes sure that if it happens and an investor makes a significant amount of money before the six-month mark, then the earnings must undergo disgorgement. The investor is then held accountable for the associated taxes. Investors also need to understand that shading is also monitored so having someone else make trades for another investor is frowned upon.
- Don’t Follow the Disclosures
If a disclosure is made, the investor will know what is going on, but others are not able to use the information in time because an insider had already followed through with a trade. This is what regulators watch out for when knowledge is used but has not become public yet.
- Be Familiar With 8-K
Although an insider is permitted to make trades, the difference lies when a trade occurs prior to public knowledge. This is where an 8-K form comes into play that must be used to disclose all information relating to earnings, division, any acquisitions, or mergers.
- What Makes You an Insider
Ok, now that you have worked for your company for a while and you are given company stock as a yearly bonus, you may wonder if this makes you an insider. Well, yes and no. However, owning shares does not make you an insider because the stock is not necessarily available for trading until at least a few months due to them being “unavailable.” This decreased availability is determined by the rules governing the stock.
- Inquire About Your Status
If there are any doubts concerning you being an insider, you are free to contact your company’s investor relations. However, when you inquire, you will likely be told that you need to be considered an executive or a shareholder that owns at least 10% of a company. For those who are in this situation, you may want to get your SEC Form 3 ready for filing.
- A Trade Doesn’t Have to Be More Than That
Many companies have begun to maintain their SEC compliance. So chances are the shares that you have are likely overseen by a company policy that prevents insider trades from occurring. The reason for this is to ensure that all parties involved are on the same page and lets the investors know that they really do come first. Plus, just because a trade occurs it does not convey anything negative. It could just be that the individual may have required the money in order to make a necessary purchase.
Founder & Editor-in-Chief of Pinstripe Magazine. Creative thinker and menswear designer who has been writing articles dedicated to men’s fashion, lifestyle, luxury items, home design, gear, grooming and gadgets since 1998. For info on PinstripeMag, any editorial needs or to contact me please email at marv@pinstripemag.com.
