Insider trading is an illegal activity in trading stocks when a stock trader is using information that was not officially disclosed. Such information is called inside information. Such trading is called ‘insider’ trading because usually the person that gets inside information is an employee of the company and gets such information from the inside.
Of course, insider trading is illegal but still many people try it and some of them get in jail. However, insider traders can make millions using inside information if it has critical importance, and it is not hard to understand why people are keep trying their chances.
There are a lot of different schemes in insider trading and not all of them are easy to track. Most of the time, insiders are not buying stocks on their own account but are using other people (friends, relatives) in their schemes to hide the participation of theirs self. Some of them still can be cached. The institutions that supervise stock market (as SEC) usually don’t have enough of power, but they use simple process: if they see that important news come out and they notice that stock had been increasing before the official announcement significantly, they can start a research of a case.
Inside trading damages whole effectiveness of a stock market because honest investors are cheated by traders that use non-public information. For this reason, managers and employees of the company (or related company) that know important information that was not disclosed publicly cannot use it and must keep it confidential, otherwise they are against the law.
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