how is insider trading prevented on events like earnings of mega companies such as Nvidia, Apple, Microsoft, Google, etc…? Even layman can think of ways how key people in those companies could earn billions and billions via some sort of nominee figures. So, are they just doing that?
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Everyone is allowed to trade based on info that is available to the public.
‘Insider trading’ means trading based on information that only a few people have. It is illegal because it is an unfair advantage.
When I worked for a large publicly-traded company, and earnings announcements or product announcements were imminent, we had ‘blackout periods’ (a few weeks before & after the announcement) where employees were forbidden from trading in the company’s shares or executing their stock options. If you were caught, that was a terminable offense, and if the sum is large enough, it means an unpleasant visit from the SEC.
That applies to every employee all the way to the CEO, not just the rank and file. Every once in a while, someone high up and wealthy decides they don’t want to take a multi-million financial hit if a bad earnings announcement is imminent and tries to sell stock before the news becomes public. But large sums of money are hard to hide when they leave a paper trail, so they frequently get caught by the SEC. You have to forfeit what you earned, and the additional penalties on top are often very steep.
TL;DR: Insider trading is hard to hide, often caught successfully, and involves losing what you earned with additional big penalties.
short answer: hindsight is a b***ch, and the stock market is full of people who can afford *very* good lawyers.
while theirs little at the time that could be done, the fact that you traded on insider information for person profit would very rapidly become clear to anyone intrested in finding out, because your stock trades are generally publicly discoverable, in large part to ensure fair play like this.
ergo, the fact that you cashed out JUST before major news that caused price changes came out would be obvious once the change happened, and you would get investigated by a lot of people who just lost money and are wondering what you knew, when.
Since the modern financial system is the product of literally *centuries* of people trying to outplay the game, Theirs very few tricks that someone hasn’t already thought of & tried, and rules written to punish the next attempt.
so, the answer is the threat of legal punishment is part of what keeps them honest. its not perfect, but anything that “even a layperson can think of” has rules in place to stop it, which are backed by the collective legal and financial might of *everyone else in the market*, in a sort of mexican standoff sorta way.
Trading windows. We’re not allowed to make trades involving the stock during certain times of the year, usually before earnings announcements.
The other posts here are correct.
In addition, enforcement happens even when there is merely a risk of insider trading.
For example, if a company has a major event (like something disclosed on a Form 8-K) that meaningfully impacts stock price, FINRA will investigate insider transactions around the time of the event, and will contact the company to learn who might have known about the event before it was announced. They do this any time there is a major event, even if there isn’t any suspicious trading activity.
In addition to the blackout or trading windows, some people (generally the Board and the Section 16 Officers) literally cannot trade without permission from the company’s legal dept., and the lawyers have every reason not to help trade on inside info.
Finally, if you are convicted of insider trading, you lose certain legal privileges. You will never again have a job as an officer at a publicly traded company, and if you are an officer at a private company that company cannot take outside investment money as easily as otherwise. It is also generally required to be disclosed as part of an investment (think venture capital and private equity), and many investors simply don’t want to be associated with it, even if they subjectively believe that you are honest (other than your insider trading). In addition to the reputational impact, those roles tend to be extremely lucrative, making the quick-and-risky insider trading route a lot less attractive.
The ease of discovery everyone talks about is valid, but there’s another angle to this too. Insider trading is a crime against other very rich folks, not merely against small investors. All billionaires depend on everyone honoring this “pact”, or there would be no stock market at all, it would all come crumbling down.
The SEC has been known to lack teeth on quite a few financial crimes, but insider trading is one that they are very good at hunting down and prosecuting.
>So, are they just doing that?
No. That would illegal, and very rude indeed.
What can occasionally happens is you saying something like “oh dear”, or just laugh when a friend ask how work is going while sipping porto in the Club smoking room.
It’s a small club indeed. And very very international, Pls remember SEC is an USA entity, and even if those companies are based in US, they are multinational corporations.
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