Although it may seem harmless, insider trading gives a select few information that regular investors don't have, putting them at a disadvantage.

Those found guilty of insider trading can be hit with substantial fines and even prison time.

Legal Insider Trading

When insider trading is mentioned, it is usually in reference to an illegal act. Not all insider trading, however, is illegal. Legal insider trading can occur when "corporate insiders," officers, directors or employees buy and sell stock in their own companies. When corporate insiders make these trades, however, they must be fully disclosed to the SEC.

Illegal Insider Trading

Illegal insider trading occurs when corporate insiders abuse confidential or "nonpublic" information to either trade securities or pass that information to others who do so.

For example, a CEO who was aware of a very profitable financial quarter before that information was released to the public could buy the stock immediately before it increases in value.

Civil Insider Trading Penalties

Civil penalties, those faced from charges brought by a lawsuit, can be assessed for insider trading. There are, however, limits to those penalties. The person who commits the violation and makes the actual trades can be assessed a maximum penalty of three times the profit gained or loss avoided from illegal activities.

The maximum penalty for the controlling person, someone who controlled the person committing the violation, is either £650,000, or three times the amount of the profit gained or loss avoided, whichever of the two is more.

Criminal Insider Training Penalties

Individuals convicted of wilful violation of the U.S. Securities Exchange Act can face up to 20 years in prison and £3 million fines for each violation. If the accused can prove they had no knowledge of insider trading laws, they will only be subject to a maximum of £3 million in fines and no prison time.

Corporations can be fined up to £16 million (Reference 3).