By Anthony J. Ogorek
With the indictment of Rep. Chris Collins on charges of insider trading, it may be helpful to understand what it is, and why it matters to you.
At its essence it is trading by an insider, typically a corporate officer or other employee, a government employee, political intelligence consultant, or any other person who possesses material nonpublic information on a company, and trades on that information or “tippees” friends, relatives or others who have traded based on this information. There is nothing wrong with inside information; you just can’t trade on it.
When companies go public for financing, they offer shares of the company in an initial public offering. The company gets your money; in return you receive shares in the company. However, what happens if you no longer wish to hold those shares? Sell them back to the company? Sorry, they already spent your money on any number of projects.
So what can you do? Enter the need for a stock exchange. An exchange is an organization created to facilitate the movement of shares of stock from one investor to another. The relevance of a stock exchange to insider trading is that every transaction has two components – a buyer and a seller.
For every person who is selling because he thinks the prospects for a stock are poor, the other side of the trade, the buyer, believes the stock has a bright future. As you can see, anyone who benefits from insider trading is doing so at the expense of another investor. Insider trading is just another term for stealing from the investor on the other side of the trade.
The Securities and Exchange Commission is charged with enforcing the terms of the Securities Exchange Act of 1934 under which it was created. The SEA was enacted by Franklin D. Roosevelt’s administration in response to assertions that activities such as insider trading contributed to the 1929 stock market crash. As the SEC mentions on its website, “because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the SEC has treated the detection and prosecution of insider trading violations as one of its enforcement priorities.”
Insider trading matters when you need to save for your retirement or your child’s education and you take a jaundiced eye toward the markets. You believe that the game is rigged and “insiders” are profiting at your expense. You stop investing in your 401(k) or other retirement plans. Your standard of living is not what it could have been because you took a pass on investing in the shares of our nation’s most dynamic and innovative corporations. It matters because you lost your faith in America.
Anthony J. Ogorek is founder and CEO of Ogorek Wealth Management.