If your cousin Jimmy who works at Air Canada tells you that the airline’s sales are going through the roof, and no one else outside the company knows about it yet, you might be tempted to buy the company’s stock to get rich quick. This is not a good idea, as doing so is the textbook definition of insider trading.
Insider trading is totally illegal in Canada as well as in most countries. Therefore, buying or selling a security on which you have an inside information can lead you to jail, where your stock picking skills won’t likely be very useful.
Investing is all about everyone having the exact same knowledge on a security, as the information on a company and stock is made public. Even if you don’t invest in a stock or company using insider knowledge doesn’t mean you are in the clear just yet. Even if you tip someone off about some sort of nonpublic information, you are still technically guilty of insider trading (as is the person you told). As a result, both you and your friend could be in some serious trouble for this as well.
If you trade with insider knowledge before it is made public, you are committing a crime. But if you use the information after it has been released to the public, it is no longer considered insider trading.
Directors, large shareholders and other officials of a public company can buy and sell shares of the said company, but they must generally disclose their trading activities to the public. In Canada, those disclosures are available to the public on the website of the System for Electronic Disclosure by Insiders (SEDI).
Over the years, billions of dollars have been insider traded illegally and thousands of people have gotten in major trouble for it. Even Martha Stewart (yes, that Martha Stewart) served a couple of months in prison as it was discovered that she sold some of her shares in a biopharmaceutical company after being tipped off that the firms’ new drug would not get regulatory approval.
Related Terms
If a company was an apple pie, a stock would be a slice of the pie. In short, a stock is a slice of a company. Everyone who owns a piece of a company has the right to share a portion of the profits of the company. Read more
The stock market encompasses all the people, companies and institutions buying and selling slices of publicly-owned companies and other securities. Read more
Discount brokers are the intermediaries through whom you can buy and sell stocks, bonds, options, parts of mutual funds or other securities (and basically anything else that is traded on the stock market and/or has to do with investing). Read more
About The Author: Mathieu Tousignant
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