eli5 if most company’s ceo are payed in stocks, what’s preventing them from literally doing insider trading


eli5 if most company’s ceo are payed in stocks, what’s preventing them from literally doing insider trading

In: 7

The risk of getting caught. Occasionally people will go to jail for that.

You just have to be careful how much you can get away with.

Well if they’re caught, bad things can happen. And they’re more likely to be caught because all of their trades are made public by law.

And they don’t really need to. A CEO getting a crapton of public stock can cash in on a fraction of it based on public knowledge, or even when the stock is down, and still have enough for another six yachts.

They are closely monitored. They have to announce their trades months ahead, and if they suddenly have a billion in cash and all their stock is gone but they didn’t announce a trade you know something is fishy

It’s illegal. The Securities and Exchange Commission is careful to watch for these sorts of things and will quickly prosecute insider trading.

Most companies keep their leadership from insider trading by requiring them to file any stock sale plans well in advance. If the CEO wants to sell stock, they have to file a plan with the company that sets out when they will sell the stock, how much they will sell it for, and other information.

Theoretically laws. In practice, absolutely nothing. Take Sears 1990 to 2010 as an example.

As others have said, the CEO will publish their planned sales months ahead of time – sometimes to the point of having an entire year’s worth of sales published. If they deviate from that plan by even a single share, the SEC will expect them to explain _why_ and with enough notice to allow investors to digest.

Now, of course, the CEO is still privy to inside information and can use that to inform their trades well in advance, but the idea is that by publishing well in advance of the sale, other investors can factor those sales into their own decisions. Insider trading is when you are able to make trades beneficial to you at the expense of the other investors based on inside information; its tough to do that when you announce to the world your plan to do so 3 months ahead of time.

Nearly always, insiders like this are not allowed to trade their own company stocks like a regular person would.There are large amounts of regulations around this

Generally you can only trade during certain specific times, (such as only say within 2 weeks after releasing an earnings report) so that any insider information you have is either out of date, or already public. Or you might have to do all trades in advance say, a quarter in advance. Additionally, many people simply won’t control their own stock investments, and they are handled by a independent third party, with no insider knowledge and the CEO doesn’t tell them what to do.

People who are really wealthy or get a lot of stock generally have no control over it and instead its all managed by an independent investment manager.

They literally do insider trading. There is legal and there is illegal insider trading. Illegal insider trading is trading based on nonpublic information. There will be blackout windows when they can’t trade, usually leading up to quarterly reports or before any major deal closes. All their trades are monitored and listed somewhere like here: https://www.secform4.com/insider-trading/1043298.htm

So if Amazon released bad quarterly numbers and Jeff dumped a bunch of his shares a week before, that would be pretty obvious. Instead he says I’m going to be selling X shares in Y months time. Maybe he just needs money, maybe he thinks there is bad news in future, but everybody else has time to sell before he does.