Is insider trading illegal?

4 February 2023
Is insider trading illegal?

Insider trading is a sensitive topic in the world of finance and investments. Many people believe that insider trading is illegal, but the truth is that it can be legal if the proper steps are taken. One of the key requirements for legal insider trading is the filing of Form 4 with the Securities and Exchange Commission (SEC). In this article, we will explain what Form 4 is and how it works.

Form 4 is a document that must be filed with the SEC by insiders, such as company executives and board members, whenever they buy or sell shares of their own company's stock. The purpose of Form 4 is to provide transparency and prevent insider trading, which is the use of non-public information to make trades for personal gain.

The form requires the insider to provide information about the trade, including the date of the trade, the number of shares bought or sold, the price paid or received, and the purpose of the trade. The insider must also disclose any relationship they have with the company, such as a direct or indirect ownership interest.

Form 4 must be filed within two business days of the trade and is publicly available on the SEC's website, allowing anyone to view it. This information is valuable for investors, as it provides insight into the company's financial performance and future prospects.

In order for insider trading to be legal, the insider must file Form 4 and not trade on material, non-public information. This means that the insider must not use information that is not available to the public to make a trade. If the insider does use material, non-public information, it is considered illegal insider trading and can result in significant penalties and legal consequences.

It is important to note that just because an insider files Form 4, it does not guarantee that the trade is legal. The SEC closely monitors insider trades and investigates potential violations. In some cases, the SEC may take legal action against individuals who engage in illegal insider trading.

Summary

In conclusion, Form 4 is a crucial tool for preventing insider trading and promoting transparency in the stock market. By requiring insiders to file the form whenever they buy or sell shares of their own company, the SEC helps to ensure that trades are made fairly and that investors have access to accurate and complete information about the company. If you are an insider, it is important to understand the requirements of Form 4 and to ensure that all of your trades are legal and compliant with SEC regulations.

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